The market is ripe for merger and acquisition activity in the media and telecom sectors. The recession, declining advertising revenues and increasing competition from the Internet and other non-traditional media continue to put financial pressure on conventional over-the-air broadcasters. They have been particularly vocal about the impact of these factors on their profitability and competitiveness as the Canadian Radio-television and Telecommunications Commission (CRTC) considers a possible new compensation regime for the broadcasters’ over-the-air signals and as the 2011 deadline for transitioning to digital television approaches.

We expect these pressures and ongoing changes in the demand for media to put individual assets or groups of assets into play. We also see these pressures prompting some media companies to streamline their activities and shore up their capital structures by exiting non-core or unprofitable businesses. The recent closures and sales of local television stations may signal this trend.

Structural changes in the wireless market will also likely lead to asset movement. The Canadian government has been clear that it wants to see enhanced competition in this market. Several new entrants that emerged from the 2008 AWS spectrum auction are in the process of launching or will launch in 2010, with incumbents responding by upgrading their networks and adjusting their offerings. The Canadian government will also auction off the 700 MHz spectrum that will be made available from the transition to digital television, thereby also potentially creating opportunities for new entrants. We expect that these changes and developments will likely result in increased M&A activity and strategic partnerships among new entrants and incumbents alike.

In December 2009, the federal Cabinet overturned the CRTC’s decision that Globalive, a new entrant that emerged from the 2008 spectrum auction, does not meet Canadian ownership rules. Globalive immediately became eligible to begin operations following the Cabinet decision, but some industry analysts have indicated that incumbents or other new entrants may decide to challenge the decision in the courts. The ultimate outcome will be closely watched by industry participants and potential investors who are thinking ahead to the next spectrum auction or considering acquisition and financing opportunities in the meantime.