Commission publishes Letter of Unresolved Issues for proposed Vodafone/SKY merger

The Commission has sent a Letter of Unresolved Issues to Vodafone New Zealand Limited (Vodafone NZ) and Sky Network Television Limited (SKY) in relation to their proposed New Zealand merger.

On 31 October 2016 the Commission sent a Letter of Unresolved Issues to Vodafone and SKY in relation to their proposed New Zealand merger, citing concerns around vertical and/or conglomerate effects and providing an opportunity for the parties to comment. This is the first known time that the Commission has published a LUI for a proposed merger, which is usually private.

The Commission has indicated that an extension to the decision deadline (currently 11 November 2016) will also be required. While no details of the potential length of the extension have been given, it is possible that the parties will have to wait until the New Year to learn their final fate.

The proposed merger involves two applications for clearance – one from Vodafone Europe B.V. to acquire up to 51% of the shares in SKY, and another from SKY to acquire up to 100% of the assets and/or shares of Vodafone NZ. In essence, Vodafone Europe B.V. would own 51% of the merged entity with the balance being listed on the New Zealand Stock Exchange. For a more detailed summary of the proposed merger see our recent article in the Competition Policy International Antitrust Chronicle.

In the LUI the Commission explains that, on the basis of the information gathered to date, its current view is that it is not satisfied that the proposed merger will not have, or would not be likely to have the effect of substantially lessening competition. (To give clearance, the Commission must be satisfied that the proposed merger would not have the (likely) effect of substantially lessening competition.)

The Commission is considering the impact of the proposed merger on the national retail markets for the provision of (1) residential fixed-line broadband services; (2) mobile services; and (3) pay TV services, as well as the national wholesale market for the provision of pay TV services. The Commission does not currently consider that the proposed merger is likely to substantially lessen competition in any wider market for the provision of pay TV and free-to-air TV services.

The LUI notes that the Commission’s concerns around vertical and/or conglomerate effects arise from the following factors:

• the merged entity would have substantial market power by virtue of its portfolio of content, including premium content such as live rugby;
• the merged entity would have an increased incentive and ability to make buying Sky on a standalone basis relatively less attractive than buying it in a bundle (with mobile and/or broadband) offered by the merged entity, resulting in customers switching to the merged entity;
• the merged entity would have less incentive to enter into reselling arrangements than Sky would in the counterfactual, meaning rivals would be unable to offer bundles with Sky and mobile/broadband services or offer bundles as attractive as those offered by the merged entity; and
• as a result of the above, one or more rivals may lose customers to such an extent that they no longer provide an effective constraint in a telecommunications market, allowing the merged entity to profitably raise prices of a telecommunications service above levels that would prevail in the counterfactual.

These concerns are summarised in the Commission’s media release this morning:

“…while consumers may initially benefit from lower prices, rival broadband and mobile providers could lose or fail to achieve scale and become less competitively effective. Over time this could reduce competition in these markets and potentially enable the merged entity to raise prices or lower the quality of service beyond what it would be able to without the merger occurring.”

But the Commission has certainly not yet reached a final view, and could be swayed by further information. Vodafone and SKY now have just 11 days to convince the Commission that there are no competition concerns under the proposed merger, with their (and other interested parties’) submissions on the LUI due by 11 November. A cross-submission process will follow, with these due by 18 November.

While historical statistics may be just that, and each merger is fact-specific, interestingly just over half of recent mergers in which a LUI was sent to the parties were ultimately cleared by the Commission. Some of those mergers included divestment undertakings, although that seems unlikely in the current context. Unlike its contemporaries in other jurisdictions, the Commission is unable to accept behavioural undertakings under the Commerce Act 1986 – an issue that commonly sparks debate between those who practice in the competition law area.

Background: “Issues” in New Zealand merger review

The New Zealand merger review process includes the following steps:

• Statement of Preliminary Issues: For most clearance applications, the Commission publishes a Statement of Preliminary Issues. This document is generally high level, and outlines the Commission’s preliminary view of the competition issues that will be relevant to its consideration of the proposed merger. Interested parties are in invited to submit on the Statement of Preliminary issues.
• Letter of Issues: If, following its initial investigation, the Commission has concerns about potential competition issues that may arise from a proposed merger, it may send a Letter of Issues to the applicant. A Letter of Issues is intended to outline the Commission’s concerns and provide the applicant with an opportunity to provide further information that might address those concerns. Around one third of recent mergers progressed to the Letter of Issues stage (ie two thirds of recent mergers were cleared without progressing to the Letter of Issues stage).
• Letter of Unresolved Issues: If, following an applicant’s response to a Letter of Issues, the Commission has remaining concerns (ie some or all of the concerns noted in a Letter of Issues are unresolved), it will likely send a LUI to the applicant. The applicant will then have a final opportunity to provide additional information to allay the Commission’s concerns, such as divestment undertakings. Around two thirds of recent mergers that reached the Letter of Issues Stage progressed further to the LUI stage.

Further information on the merger review process in New Zealand is available in the Commission’s Mergers and Acquisitions Guidelines.