Competition Bureau searches Postmedia, Torstar offices as it probes alleged conspiracy in paper swap

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Federal Competition Bureau officials, accompanied by police, have searched the executive offices of Postmedia Network Canada Corp. and Torstar Corp. as part of a review of their deal to swap 41 newspapers, which is being investigated under the conspiracy and merger provisions of the Competition Act.

When the deal was announced in November, both companies also said they would subsequently shut down all but five of the papers. On the same day, the Competition Bureau confirmed that it would review the transaction to determine whether it could "result in a substantial lessening or prevention of competition in any market in Canada."

The newspaper closings meant that Postmedia and Torstar would face less competition from each other in some Ontario markets that are strategically important for each company: For Torstar, those are the Kawarthas and the Niagara region, and for Postmedia, those include Ottawa, London and the region encompassing Kingston and Belleville. Torstar also closed the free commuter papers 24 Hours in Toronto and Vancouver, which competed with its free Metro papers.

On Monday, the Competition Bureau issued a news release saying it hadn't made any conclusion of wrongdoing and no charges have been laid.

"Investigators with the bureau are currently gathering evidence to determine the facts relating to the alleged conspiracy," the bureau said. Citing its obligation to conduct inquiries confidentially, it added that it would not comment further at this time.

The investigation raises questions about the changing scope of competition for advertising dollars – both in Canada and elsewhere. Print newspapers have faced an existential crisis, not just from audiences that have migrated online, where advertising is far less lucrative; but also in outsized competition from digital giants such as Google Inc. and Facebook Inc. Those tech companies have accumulated scale with a massive share of the digital ad market and reams of data on consumers that advertisers demand. Both Torstar and Postmedia have characterized the deal as a matter of survival, and have suggested that in many of the markets where publications were closed, customer demand was not sufficient to sustain more than one newspaper.

The merger provisions of the Competition Act address whether the acquisition of a competitor or a competitor's assets leads to substantial consolidation that would lessen competition. The bureau has up to a year after a transaction to review it, and remedies can include dissolving the merger or altering it so that some assets or shares of assets are required to be sold off to a competitor.

The conspiracy provisions, under which this deal is also being reviewed, carry stiffer penalties – including fines up to $25-million, up to 14 years imprisonment, or both – as well as a higher bar for conviction. One type of conspiracy under the act is known as "market allocation," or an agreement between competitors not to compete in certain geographic areas. That agreement does not have to be explicit to qualify as a conspiracy, according to competition and anti-trust lawyer Denes Rothschild, a partner at Borden Ladner Gervais LLP in Toronto.

"You don't have to have a deal in writing, saying we'll stay out of your territory if you stay out of our territory," Mr. Rothschild said. "If the circumstances show beyond a reasonable doubt that there was a tacit arrangement, that can be enough to find conspiracy under the act."

Torstar and Postmedia had discussed the possibility of swapping some of their newspapers for around two years.

The deal involved mostly community newspapers, many of them weeklies, although it included some dailies and commuter papers as well.

"Closing papers doesn't make anyone happy. Loss of jobs, loss of brands – but all these products are losing money," Postmedia chief executive officer Paul Godfrey said in an interview at the time of the deal, in November. "We have no choice but to concentrate our focus. … We feel that this is a necessity. We're talking about the survival of these [remaining] papers, and the survival of the industry."

Torstar spokesperson Bob Hepburn confirmed in an e-mail that officials from the bureau visited its corporate offices "seeking more information about the transaction with Postmedia … and we are co-operating completely with them."

"In addition, as previously communicated to the bureau, Torstar will this week be voluntarily providing the bureau with additional company documents relating to the transaction," Mr. Hepburn added.

Postmedia confirmed in a statement that the bureau had executed a search warrant connected to the deal.

"Postmedia is strongly of the view that there has been no contravention of the Competition Act with respect to this matter and Postmedia is co-operating with the Competition Bureau in connection with their investigation," the statement said.

At the Postmedia offices on Monday morning, two Toronto police officers from the financial crimes unit said they were on site to accompany the Competition Bureau, who were conducting an investigation. People wearing jackets labelled "Competition Bureau" as well as Toronto police could be seen inside the 12th-floor executive offices of Postmedia. An RCMP officer was seen taking the elevator up to the 12th floor earlier in the morning.

In an interview with The Globe and Mail in January, Torstar chairman John Honderich referred to the newspaper swap as a "consolidation deal" meant to "lengthen the runway" in coping with market pressures that the company faced.

"That has meant some of the voices that have been around are no longer there," Mr. Honderich said. "In Ontario there were often competing media outlets and so now you have one, but there are areas such as Moose Jaw and others, where there's nothing. … I'd like to see a world where there are as many voices in as many places as possible. That's just not viable."

The closings led to a loss of 291 full-time and part-time jobs, mostly in Ontario.