Decision No. 667-MV-1993

September 28, 1993

September 28, 1993

IN THE MATTER OF the review by the National Transportation Agency of Canada of the proposed acquisition of seventy-five percent (75 percent) of all of the common shares of PCL Courier Holdings Inc. by Canada Post Corporation.

File No. D 2760/93-3


BACKGROUND

Chronology of Events

On June 8, 1993, the National Transportation Agency (hereinafter the Agency) received notice, pursuant to section 252 of the National Transportation Act, 1987, R.S.C., 1985, c. 28 (3rd Supp.) (hereinafter the NTA, 1987), of the proposed acquisition by Canada Post Corporation (hereinafter Canada Post) of 75 percent of all of the common shares of PCL Courier Holdings Inc., a company of which Purolator Courier Ltd. (hereinafter Purolator) is a wholly owned subsidiary.

On June 17, 1993, the Agency notified Canada Post that the notice of proposed acquisition was complete. The Agency published notice of the proposed acquisition in the Canada Gazette on June 26, 1993 with a deadline for the filing of objections of July 26, 1993. The Agency received six objections within the specified time from the following parties:

  • Ontario Trucking Association
  • Federal Express (Canada) Ltd.
  • United Parcel Service "Canada" Ltd., Dicom Express Inc. and D.H.L. International Express Inc. (joint objection)
  • Westminster Holdings Inc.
  • OCS Oversea Courier Service
  • J.M. Dean

Upon receipt of the first objection on July 6, 1993, the Agency gained jurisdiction to review the proposed acquisition by Canada Post. Pursuant to subsection 257(1) of the NTA, 1987, the deadline for the issuance of an Agency decision on the review of the proposed acquisition was established as October 15, 1993, being 120 days from the Agency notification to Canada Post that the notice was complete.

On August 6, 1993, Canada Post filed an answer to all objections.

The Agency decided to hold a public hearing as part of its review of the proposed acquisition by Canada Post and issued a Notice of Public Hearing on August 11, 1993. The hearing commenced on September 7, 1993 in Hull, Quebec and concluded on September 8, 1993.

The Agency received 43 interventions with respect to the proposed acquisition.

As part of their notice of proposed acquisition and in response to an Information Demand Letter issued by the Agency on July 30, 1993, Canada Post and Purolator filed a number of documents with the Agency for which claims of confidentiality were made. United Parcel Service "Canada" Ltd./Dicom Express Inc./ D.H.L. International Express Inc. (hereinafter UPS, Dicom, D.H.L.) and Federal Express (Canada) Ltd. (hereinafter Federal Express) filed separate Requests for Disclosure of documents and information from Canada Post and Purolator. Agency rulings regarding disclosure of documents claimed to be confidential were issued on August 27 and September 3, 1993.

Description of Canada Post and Purolator

Canada Post is a Crown corporation established under the provisions of the Canada Post Corporation Act, R.S.C., 1985, c. C-10, which states that the objects of Canada Post are to establish and operate a postal service for the collection, transmission and delivery of goods; to manufacture and provide such products and services as are, in the opinion of Canada Post, necessary or incidental to its postal service; and to provide any other services, that in the opinion of Canada Post it is capable of conveniently providing. The Canada Post Corporation Act also states that Canada Post, in carrying out its objects, shall have regard to, inter alia, the desirability of improving its products and services and the need to conduct its operations on a self-sustaining financial basis while providing a standard of service that will meet the needs of the people of Canada and that is similar with respect to communities of the same size.

Canada Post offers, in addition to its sole and exclusive privileged collection, transmission and delivery of letter mail service, other services which include a small parcel express service known as Priority Courier. Small parcel express service is that segment of the physical distribution market which entails the delivery of documents and parcels, usually differentiated by a variety of features, most of which are related to the tracking and tracing of the document and the ability to guarantee delivery by a specified time of day in a time-sensitive manner. This service is offered nationally to every physical and postal address in Canada and to 160 countries internationally.

Purolator is engaged exclusively in the small parcel express business across Canada, between Canada and the United States and internationally. Purolator transports letters, documents, and packages weighing up to 75 kilograms. Purolator picks up parcels for shipment principally from business customers in Canada, and delivers those parcels to more than l0,000 centres across Canada. Purolator employs more than 8,500 people and utilizes a fleet of over 3,300 pick-up and delivery vehicles and line-haul vehicles.

Description of Proposed Acquisition

Canada Post proposes to acquire treasury common shares of PCL Courier Holdings Inc. in order that, at closing, Canada Post will hold 75 percent of all issued and outstanding common shares of PCL Courier Holdings Inc. PCL Courier Holdings Inc. is the sole owner of Purolator. Onex Corporation (hereinafter Onex), a public company, currently holds approximately 78 percent of the common shares of PCL Courier Holdings Inc., the Ontario Municipal Employee Retirement Board (hereinafter Omers) with approximately 19 percent, and the balance of the common shares are held by other interests.

A Share Purchase Agreement entered into on June 4, 1993, sets out the terms and conditions of sale between Canada Post, Onex, Omers, Purolator and PCL Courier Holdings Inc. Under the terms of this agreement, it is contemplated that upon closing Onex will hold approximately 17-18 percent of the common shares of PCL Courier Holdings Inc., Omers will hold 4-5 percent, Purolator management will hold approximately 3 percent and Canada Post will hold 75 percent. Canada Post will pay $55 million to acquire its 75 percent interest.

A Draft Shareholders Agreement governing the relationship between Canada Post, Onex, Omers and PCL Courier Holdings Inc. was filed with the Agency. The agreement provides Canada Post with the option at any time to require PCL Courier Holdings Inc. or Purolator to purchase assets and assume related liabilities used by Canada Post in connection with its courier and expedited parcels product lines. The agreement also requires, in general, that transactions between the parties shall be on reasonable arm's length commercial terms.

AGENCY MANDATE

The mandate of the Agency under Part VII of the NTA, 1987 is clearly set out in subsection 257(1) of the NTA, 1987 which states, in part, that the Agency must form an opinion on whether the proposed acquisition is against or not against the public interest. If the Agency decides that the proposed acquisition is against the public interest, the Agency shall disallow the proposed acquisition.

In reviewing a proposed acquisition in the context of the public interest, section 4 of the NTA, 1987 states that:

"public interest" means the public interest that is consistent with

(a) the national transportation policy set out in subsection 3(1),

(b) policy directions, if any, issued under section 23, and

(c) in respect of Part II, directions, if any, issued by the Minister under section 86;

In the context of this proposed acquisition, the Agency is guided by the national transportation policy set out in subsection 3(1) of the NTA, 1987 as there are no relevant directions under either section 23 or 86.

PUBLIC INTEREST ISSUES ARISING FROM PLEADINGS

In reviewing the proposed acquisition in the context of the public interest, the Agency considered the concerns raised by objectors and interveners, keeping in mind the national transportation policy objectives contained in section 3 of the NTA, 1987.

The objectors to the proposed acquisition raised a number of common concerns. These included fears of market domination, which could lead to reduced competition and predatory pricing; the abuse of special privileges granted to Canada Post; and the possibility of cross-subsidization by Canada Post between competitive services (i.e., small parcel express) and the exclusive privilege letter mail service. Interveners in opposition to the proposed acquisition also raised the issue of reduced competition.

Interveners in support of the proposed acquisition generally expressed the opinion that competition would be enhanced by the transaction. These interveners argued that the transaction would strengthen the courier industry in Canada, would ensure a large Canadian presence in the Canadian courier industry and would ensure that the existing regional infrastructure would remain in place to serve users. As well, they were of the view that Canada Post and Purolator together would be in a better position to invest in service-improving technology for the small parcel express business.

In exercising its mandate under the NTA, 1987, the Agency is directed under subsection 3(1) to have:

... due regard to national policy and to legal and constitutional requirements, ...

The fact that Canada Post was established as a Crown corporation to fulfil certain objectives is a matter of government policy as are any privileges accorded to the Crown corporation. The issue of special privileges enjoyed by Canada Post as a Crown corporation has been duly noted by the Agency in its review of the proposed acquisition.

Regarding the needs of shippers and continued service throughout Canada referred to by the interveners in support of the proposed acquisition, Canada Post and Purolator presented evidence in this regard at the public hearing. These issues have relevance in the context of the national transportation policy objectives that effective transportation services are essential to serve the transportation needs of shippers and to maintain the economic well-being and growth of Canada and its regions.

AGENCY EXAMINATION OF PUBLIC INTEREST ISSUES

Market Dominance and Level of Competition

The public interest, as has been noted, includes national transportation policy objectives as set out under subsection 3(1) of the NTA, 1987 wherein it is stated, inter alia, that "... competition and market forces are, whenever possible, the prime agents in providing viable and effective transportation services, ...". Therefore, the Agency assessment of the proposed acquisition included an examination of competition within the courier industry (small parcel express business) in the context of this stated policy objective.

A competitive market can be described as one where many firms compete with each other to provide the same or highly comparable services; there are no major barriers to entry; no one firm has market dominance or market power; rates for services are cost based; and substitutable services exist as potential entrants.

The Agency reviewed written and oral evidence from the parties indicating that the Canadian small parcel express business, which consists of the movement of documents and small parcels, fits the above description of a competitive market. Many firms compete throughout Canada, in excess of 2,400 firms, and rates for services are market driven with rate discounting common particularly with large business customers. As well, the Agency reviewed evidence indicating that there are many firms currently offering transportation services that could be used as substitutes to small parcel express firms. Examples of such are trucking companies (transporting packages) and electronic communications firms (transmitting documents). On the basis of the evidence reviewed, the Agency is of the opinion that the Canadian small parcel express business is highly competitive.

The issue of competition and the impact thereupon of the proposed acquisition was raised by objectors wherein allegations were made that the combined operations of Canada Post and Purolator would result in excessive market share with possible market dominance or market monopoly resulting. The allegation was made that the combined operations of these two companies would represent 67 percent of the Canadian small parcel express business. This was accompanied by an expressed concern that market abuse could ensue, i.e., higher rates for services or predaroty pricing. Objectors also voiced concern over a federal Crown corporation expanding its services to compete with firms in the private sector.

The Agency heard evidence on behalf of Canada Post at the public hearing from Professor Richard Schwindt, Department of Economics, Simon Fraser University, on the matter of competition in the small parcel express business. Professor Schwindt's assessment of the size of the Canadian small parcel express business, estimated at $2.5 billion, was based on the 1993 Statistics Canada study of the Canadian courier industry augmented with results from other groups of transportation companies that have significant courier business but are not primarily engaged in this market. Examples of such firms are Canada Post, airline companies, trucking companies offering less than truckload services, intercity bus companies and freight forwarding companies, all of which transport small packages on an expedited basis and were excluded from the Statistics Canada study. The size of the small parcel express market was defined in terms of annual revenues generated by firms providing these services. Based on Professor Schwindt's results, the combined Canada Post and Purolator market share in Canada was in the order of 31 percent (9 percent for Canada Post and 22 percent for Purolator).

Canada Post presented evidence at the public hearing that the statement made by Mr. Lander, President and Chief Executive Officer of Canada Post, to the Standing Committee on Consumer and Corporate Affairs and Government Operations in April, 1992 that Canada Post's market share of the Canadian courier market was 24 percent was in error. Canada Post testified that the figure, based on its knowledge of the size of the small parcel express business at that time, should have been 14 percent.

Regarding the reported 43 percent market share of Canadian courier business for Purolator in the 1992 Onex Corporation Annual Report, testimony was given at the public hearing that this figure was based on the six largest national courier companies operating in Canada and therefore did not reflect accurately the true Purolator market share.

After having reviewed the 1993 Statistics Canada study on the Canadian Courier Industry and the evidence (both oral and written) provided by the parties to the proceeding, the Agency is of the view that the market size and market share information developed by Professor Schwindt represents the current best estimate of the extent of the Canadian small parcel express business and that the Canada Post and Purolator combined share of this market is in the order of 31 percent.

The Agency recognizes that Professor Schwindt's estimate of the market size of the small parcel express business excluded Canada Post's regular parcel service. Canada Post testified at the hearing that Regular parcel service was not included because none of the features of pickup and guaranteed delivery, track and trace or money back guarantee for failure to deliver by a specified time apply. Canada Post testified that regular parcel service was an economical, over-the-counter service with delivery in four to eleven days that did not fit into the category of an expedited service. The Agency is in agreement with the exclusion of regular parcel service from the small parcel express business.

The Agency has also considered the implications of the combined market share of Canada Post and Purolator in terms of impact on the level of competition and possible impact on competitive rates for users. The Agency notes that there is extensive competition in the Canadian small parcel express business on a national, regional and local basis which, in the Agency's view, will not be adversely affected by the proposed acquisition. Neither Canada Post or Purolator has a dominant market position nor will their combined operations represent a dominant market position. Neither company has market power that would enable it to influence user choice or set rates that are well above cost. The existence of numerous competitors throughout Canada, as well as the existence of many firms offering substitutable services, that could very easily enter the market precludes the ability of Canada Post and Purolator to influence the market. The Agency is therefore of the view that user choice and rates in the Canadian small parcel express business will remain market driven.

Turning to the matter of a Crown corporation competing with private sector firms, the Agency notes that the policy objective related to competition in subsection 3(1) of the NTA, 1987 does not exclude competition on the part of a Crown corporation. There is no statutory prohibition in the NTA, 1987 against a Crown corporation that would preclude competition with private sector firms.

Shipper Needs and Service Throughout Canada

The Agency heard evidence at the public hearing from Purolator regarding its Canadian network of retail outlets, depots and drop boxes that are utilized to serve users in more than 10,000 points throughout Canada. Purolator indicated that it has a policy of establishing outlets in the more remote communities of Canada and of hiring local residents as employees. Purolator described this commitment as one of improving the competitive position of local businesses, of providing service of equal standard to remote areas as that available in large urban centres and of providing local employment opportunities.

Purolator indicated at the public hearing that it differentiates itself from other major competitors by serving smaller communities through its own outlets staffed by its own employees rather than relying upon third-party agents. Purolator expressed the view that its marketing strategy of an extensive network of services to more remote areas provided a marketing advantage over other national competitors which outweighed any opportunity costs incurred by serving certain routes that may be less profitable.

Based on an examination of the implications of the proposed acquisition on shippers and services across Canada, the Agency cannot identify any adverse impacts on the needs of shippers or on the economic well-being and growth of Canada and its regions.

Cross-subsidization

A number of objectors expressed concern that Canada Post has in the past cross-subsidized its competitive courier operations from revenues derived from its monopoly letter mail service. The objectors argued that the proposed transaction would enable Canada Post to cross-subsidize the small parcel express services of Priority Courier and Purolator, thus providing them with an unfair competitive advantage. In its objection, Federal Express stated that as a result of cross-subsidization, Canada Post and Purolator would be able to artificially lower their costs, reduce their rates and increase their market share of courier business.

In its answer to the objections filed, Canada Post stated that its competitive small parcel express operations are not cross-subsidized by its exclusive privilege letter mail service. Canada Post indicated that its competitive products make a positive contribution to the Crown corporation's operating income. Canada Post also indicated that it had retained outside experts to review the reasonableness of its product costing methodology.

Canada Post also testified that products or services that are provided to Purolator will be priced at market value in accordance with a provision in the Draft Shareholders Agreement which requires that non-arm's length transactions between Canada Post and Purolator be effected at fair market value (a requirement of taxation authorities). Canada Post argued that such a provision provides a structural disincentive to cross-subsidization.

With respect to allegations of cross-subsidization by Canada Post of its competitive small parcel express operations, the Agency wishes to point out that it has no regulatory control over the pricing and costing of Canada Post's products and services. The Agency would also like to draw attention to Canada Post's testimony that postage rate increases in respect of letter mail must first be approved by Governor-in-Council. The Agency also notes that Canada Post filed information on a confidential basis that supports its position that there is and has not been any product cross-subsidization.

The Agency is of the view that there is no evidence to support the allegation that cross-subsidization between Canada Post and Purolator would occur as a result of the proposed transaction.

CONCLUSION

Based on the foregoing analysis of public interest issues, the Agency concludes that the proposed acquisition is not inconsistent with the national transportation policy which provides (1) that competition and market forces be the prime agents in providing viable and effective transportation services; (2) that effective transportation services are essential to serve the transportation needs of shippers and to maintain the economic well-being and growth of Canada and its regions; and (3) that transportation is recognized as a key to regional economic development so that the potential economic strengths of each region may be realized.

The Agency concludes that, if the proposed acquisition of Purolator by Canada Post is implemented, (1) competition in the small parcel express business will not be jeopardized; (2) the range of courier service options will not be restricted; and (3) services to the regions across Canada will not be materially affected.

DECISION

After having conducted a careful review of the proposed acquisition by Canada Post Corporation of 75 percent of the common shares of PCL Courier Holdings Inc. of which Purolator is a wholly owned subsidiary, the Agency is of the opinion that the proposed acquisition is not against the public interest. Consequently, the proposed acquisition is not disallowed.

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