Competition experts warn of OFT probe into Sky's ITV move

BSkyB's audacious decision to spend £940m on a near-20 per cent stake in its free-to-air rival ITV has divided opinion within the media industry. The jury is out on whether the move constitutes anti-competitive behaviour that could damage the broadcasting industry or whether it is a bold move that both serves the interests of ITV and Sky in the long run.

The fur was still flying yesterday as Steve Burch, chief executive of NTL, said: "We believe BSkyB has exhibited anti-competitive behaviour and we firmly believe they are exerting material influence on ITV and Freeview and they should not be permitted to do this."

Mr Burch added: "They continue to want to have an unreasonable and unfair grip on the media in this country."

Yet those within the TV industry not directly involved in the spat proved more sanguine about Sky's plan of attack. Luke Johnson, chairman of Channel 4, said: "I am not quite sure how it is anti-competitive because surely maintaining ITV's independence does not constitute anti-competitive behaviour. It is a pricey but bold and fairly imaginative move that seems to me to have kyboshed NTL's bid."

Sky's argument that ITV shares are undervalued was given some credence yesterday when a collapse in ITV shares failed to materialise. Despite fears that shares could fall below 90p after Sky's move, the stock held up well. It closed down a mere 1.1 per cent at 114.5p. Fidelity, the private equity company that sold out to Sky, was rumoured to be behind some of the buying.

However analysts did not buy Sky's valuation arguments. Miranda Carr, an analyst with Bryan Garnier, said the move "appears purely designed to scupper NTL's bid for the free-to-air broadcaster.".

NTL is now stuck between a rock and a hard place and will rely on regulators to salvage its bid to buy ITV and create a media powerhouse designed to compete against Sky. The cable company had entered talks with ITV regarding a bid around the 120p level but Sky scooped up its stake at an inflated level of 135p.

The company will take little comfort from the view that Sky has acknowledged the industrial benefits of folding ITV into its business. Ms Carr said: "While some commentators could not see a strategic fit for NTL and ITV, BSkyB obviously thought it was such a threat that it decided to spend £940m of shareholders' money on preventing it."

Sky's stake means that NTL cannot purchase 100 per cent of ITV's equity so it cannot consolidate the broadcaster's cash-flows and cannot effectively use the billions of pounds in tax losses against future profits. Such issues were key to NTL's strategy to acquire ITV so soon after it consolidated cable rival Telewest and Virgin's mobile phone arm.

Thus it has raised the spetre of regulatory intervention as it reviews its options regarding the ITV bid. Sky has been careful to comply with the Communications Act of 2003 by keeping its stake below the 19.9 per cent level. Yet NTL hopes to convince regulators that it raises sufficient concern in regard to the Enterprise Act that competition authorities will force it to divest or reduce its stake.

NTL's arguments would rest on whether Sky would have material influence over ITV's direction, in particular in the area of content rights, such as premier league football where ITV and Sky have directly competed against one another, and advertising.

The Office of Fair Trading looks set to address NTL's concerns over the coming months before deciding whether to refer the acquisition of its ITV stake to the Competition Commission.

The regulator will need to consider whether Sky's purchase constitutes a merger and what sort of influence the pay-TV operator is likely to wield at ITV according to Richard Eccles, a partner at law firm Bird & Bird. "It will need to consider whether ITV can take decisions without consulting Sky," he said.

Sky said it has made it clear that it wishes to support the board of ITV in its continuing stewardship of the company. It said it does not intend to seek a seat on the ITV board and that its investment in ITV does not enable it to exercise material influence over ITV's policy and operations and hence is not a merger under UK merger rules.

Competition lawyers argued that from a legal standpoint, the pay-TV market has typically been viewed as separate from the free-to-air market, meaning Sky could argue that it is not a direct competitor of ITV's. Nevertheless lawyers believed that there is enough scope for concern for an OFT review.

One competition lawyer, speaking off the record, said: "Sky is sailing close to the wind. It is certainly prepared to take the regulator on but the question will be whether its attempt to thwart the NTL takeover is successful. It is finely balanced at this stage."

Alistair Woolich, a partner at law firm Lawrence Graham, said that there was sufficient concern that the Office of Fair Trading was likely to review Sky's move.

Mr Woolich said: "There is definitely an issue there. Just because they [Sky] are under 20 per cent does not mean it will be accepted."

Any potential review of the deal could drag on for up to a year, further putting pressure on ITV's board as it searches for a chief executive and battles against tough market conditions.

Telecoms and media regulator Ofcom will also review whether the change of control will in any way affect the company's public service obligations and has started reviewing the situation as a result. It declined to comment on any competition issues.

NTL could potentially take its complaint to the European Commission although lawyers said that avenue could take years as opposed to months.

Another potential area for concern that regulators will consider is whether the deal affects the plurality of media within the sector, given Sky is also linked to News Corp which owns a large chunk of the UK newspaper market. Lawyers said this would be an area that the Department of Trade & Industry would need to explore.

The question of legality over Sky's investment in ITV will have City lawyers for all sides raking in the fat fees for months to come.