Watchdog lays into Sky over ITV stake

James Murdoch's BSkyB was dealt a major blow today after the Competition Commission said its 17.9% stake in ITV represented a significant lessening of competition in the UK television market.

The Commission said Sky may be ordered to sell the stake, which it bought for £940 million last November to block Virgin Media's attempted £9 billion merger with ITV.

Other remedies suggested by the Commission include ordering Sky to reduce its holding to below 10% or 15%, or to give undertakings it will reduce its voting rights at ITV and will not take a seat on the board.

ITV said it welcomed the findings. Sky, Virgin, ITV and any other interested parties now have three weeks to respond to the Commission and come up with their own suggestions to solve the problem. This is likely to be a period of intense negotiation. After that, the Commission will make it recommendation to Business Secretary John Hutton.

Sky is expected to go into overdrive in the next fortnight as it attempts to reach a compromise with the Commission but also tries to see if there could be a get-out by selling its stake to another potential investor in ITV. It has already held talks with Five owner RTL about the holding.

But having paid 130p a share for his stake, Sky chief executive Murdoch could face a substantial loss if he sold at the current share price. Sky, anxious to avoid antagonising the watchdog, simply noted its findings today and said it "will continue to engage with the Commission".

Commission chairman Peter Freeman led the inquiry into the Sky stake. His four-man committee said that it believed Sky's stake was large enough to block special resolutions proposed by ITV. This could damage the recently outlined strategy of Michael Grade, parachuted in as executive chairman from the BBC at the start of this year.

The Commission said that Sky could limit fundraising by ITV and prevent it making takeovers of rivals. It also said it could limit ITV's investment in high-definition television and TV services over the internet.

"We thought it likely that BSkyB would influence ITV's strategy," said the Commission, adding that it saw influence being exerted on both content and commissioning of programmes.

It also objected to Sky's ability to block or approve any potential takeover of ITV "that might otherwise strengthen ITV's competitive position, or encourage the acquisition of ITV by another buyer who might act in BSkyB's interest."

But to some commentators' surprise, the Commission cleared Sky of lessening competition through its stake in several areas including TV news provision, advertising sales and joint bid-ding for sports' rights. Virgin said: "The findings are a major step towards addressing the problems. Strong remedies are required to finally resolve the matter."

ITV shares jumped 2.7p to 103.9p on revived takeover hopes. BSkyB lost 6p to 678p.

For full details of the inquiry, or to make your own response to the proposed remedies, login to the Competition Commission's website on the investigation.

http://www.competition-commission.org.uk/inquiries/ref2007/itv/index.htm