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Sky's ITV stake anti-competitive, says regulator

Competition Commission could force sale of shares

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Sky's purchase of 17.9 per cent of ITV was anti-competitive and against the public interest, the Competition Commission has ruled. It could force the broadcaster to sell the shares which are now worth over £200m less than Sky paid in 2006.

A competition law expert said a crucial factor in the Competition Commission's provisional finding is likely to have been the control that Sky could have exerted over ITV's future strategy.

Giles Warrington of Pinsent Masons, the law firm behind OUT-LAW.COM, said Sky may have been able to exert a stranglehold on ITV's future.

"If ITV wanted to fund certain departments or investments they would have to raise funds," said Warrington. "Because Sky could effectively block special resolutions if it has 25 per cent of votes at a meeting, they would be able to restrict ITV's access to finance and affect plans for expansion."

Warrington said Office of Fair Trading analysis showed that with the reduced numbers of shareholders who participate in a meeting, Sky's 17.9 per cent is often enough to block a special resolution. "Sky could have an incentive to do that, to block future innovation by ITV, so it could be of benefit to Sky," he said.

A special resolution is only passed with the support of 75 per cent of votes cast – so it can be blocked by any party that has a shareholding equating to 25 per cent of votes cast plus one vote. Because many shareholders do not exercise their right to vote, a shareholder owning less than 25 per cent of a company can often block a special resolution.

The Competition Commission announced its provisional findings and will produce a full report later this year. It said Sky parent BSkyB's shareholding did not have a detrimental effect on overall plurality in the market or news production, but it did say the deal could have a negative effect in the arena of long term ITV strategy.

"The acquisition has made BSkyB ITV's largest shareholder by some margin and whilst our provisional view is that this would not necessarily affect day-to-day operations, BSkyB would be able to influence ITV's key strategic decisions, particularly relating to investment, whether in content, capacity or new technology," Competition Commission chairman Peter Freeman said.

Though it was a minority stake in the broadcaster, Sky's was the biggest single shareholding in the company. This gave it more power than anyone which, Warrington said, could have been as big a factor for the Competition Commission as the exact amount of the shareholding.

"It raises the fact that a minority interest can raise concerns if it is held by a trade player in one of its competitors, where the trade player is the largest shareholder," said Warrington. "That can be the case even if it is a relatively low shareholding."

Sky bought its stake in ITV in November last year for £940m. This week the stake was worth just £720m.

The Competition Commission will send a report to the Secretary of State for the Department for Business, Enterprise & Regulatory Reform (BERR) John Hutton. Hutton can only decide what remedy to impose on Sky if part of the remedy relates to the public interest complaints about the deal.

Because the Commission does not have concerns about the public interest part of the complaint, it is likely that Hutton will have to pass the issue back to the Competition Commission to decide on a remedy, said Warrington.

Copyright © 2007, OUT-LAW.com

OUT-LAW.COM is part of international law firm Pinsent Masons.

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