Unresolved issues loom over Vodafone / Sky TV merger

By:

On 29 June 2016, Vodafone Europe B.V. (Vodafone Europe) and Sky Network Television Limited (Sky) applied for clearance from the Commerce Commission (Commission) for the proposed merger of Vodafone New Zealand Limited (Vodafone NZ) and Sky (Application). The proposed merger involves two separate acquisitions, the first being the acquisition by Vodafone Europe of up to 51% of the issued share capital in Sky and the second with Sky acquiring 100% of the assets and/or shares of Vodafone NZ. The effect of which would result in the combination of Vodafone NZ's mobile and fixed telecommunication networks with Sky's television offerings in New Zealand.

What are the markets? 

The Commission's focus is on the following markets (Relevant Markets):

Telecommunications markets:

  • The national retail market for the provision of residential fixed-line broadband services, and
  • The national retail market for the provision of mobile services
Broadcasting markets:

  • The national retail market for the provision of pay TV services, and
  • The national wholesale market for the provision of pay TV services

Where is the process at? 

The Commission will grant a clearance if it is satisfied that the proposed merger would not, or would not be likely to, substantially lessen competition in any market. The onus is on the applicant to satisfy the Commission and if the Commission is ultimately not satisfied, it will decline the clearance.

The process involves a number of stages, depending on the complexity and issues raised. Shortly after filing, the Commission publishes a statement of preliminary issues, which is a public document and is used as a basis to invite parties to express views on the proposed merger. Second, following detailed analysis and investigation, the Commission sometimes issues a letter of issues to the applicant. This sets out the concerns the Commission has and invites the applicant to provide further information/arguments. If the Commission are still not satisfied, they issue a letter of unresolved issues. 

In terms of the Application, on 31 October 2016, the Commission issued a letter of unresolved issues. As is standard for such letters, the Commission stated that, based on the information provided to date, it was not satisfied that the proposed merger would not have, or would not be likely to have, the effect of substantially lessening competition in all the Relevant Markets. Unusually, this was released to the public, we assume because of the importance of the issues raised and the number of interested parties. 

What are the unresolved issues?

The underlying concern of the Commission surrounds the bundling of products. The Commission is concerned that the merged entity would be in a position to offer consumers standalone Sky packages at prices and standards relatively less attractive to those offered by the merged entity in a bundle. Consequently, the Commission believes that current Sky subscribers who are not also Vodafone NZ consumers would be likely to switch to the merged entity. Additionally, the Commission believes that should clearance be granted, the merged entity may have a reduced incentive to enter into reselling agreements with other telecommunication providers. 

The Commission believes that these issues will contribute to a substantial lessening of competition in the telecommunications market, as telecommunication rivals may lose market share to such an extent that they can no longer provide an effective constraint on the merged entity.

What's next? 

While the Commission clearly has significant concerns, they are not necessarily fatal to the Application. The Commission issues similar letters each year, with about 50% of mergers still going on to obtain a clearance.

Legal counsels for Sky and Vodafone NZ have until 11 November 2016 to prepare submissions that address the Commission's concerns. Cross-submissions from parties who have made already submissions are due no later than 18 November 2016. Following this, a final decision will be made, however we understand the Commission is currently in discussions with the applicants on a final decision date and further delay is possible. 

Watch this space for updates.