Sky faces 200m loss on ITV stake as watchdog calls for sale

Sky is set to book a substantial loss as a result of its raid on ITV shares last year after the Competition Commission urged the Government to force the pay-TV company to reduce its stake in the broadcaster.

John Hutton, the Secretary of State for Business, received the Competition Commission's report last week, and has until the end of January to announce his decision, but he is unlikely to veer from the path recommended by the competition watchdog, which involves reducing Sky's near-18 per cent stake in ITV to below 7.5 per cent and ineffect banning it from being represented on ITV's board.

The Competition Commission ruled that the stake "may be expected to operate against the public interest" as it could stifle competition. It said Sky could block ITV's ability to raise funds, affecting its ability to compete against other TV companies, including Sky, in areas such as acquiring sports rights or spectrum for HD services. It added that Sky's "importance and sta-ture as an industry player" could influence other shareholders, and that Sky could disrupt a potential acquisition of ITV "that might otherwise strengthen ITV's competitive position".

The regulator said: "We concluded that, as a result of the acquisition, there was likely to be a substantial lessening of competition arising from the loss of rivalry between ITV and BSkyB in the all-TV market." It said that forcing Sky to completely divest its stake would remedy the situation, but that a part divestiture to below 7.5 per cent would be the "least intrusive" avenue to resolve its concerns.

The value of ITV's shares has fallen over the past year. Sky paid 940m for its stake at 130p a share. ITV stock closed at 84p yesterday, which values its stake at 600m. Yet the move, the crowning glory of James Murdoch's tenure as chief executive of Sky, blocked Virgin Media then NTL from acquiring ITV. The move infuriated its rival but handed Sky the initiative in the battle for high-spending pay-TV customers that ensued. The company will meet Mr Hutton over the coming weeks and has the right to appeal against the decision.

There were crumbs of comfort for Sky as the regulator found no evidence that the acquisition would affect the plurality of media ownership in the country, advertising or news provision, despite Sir Richard Branson's claim that the move represented a "threat to democracy".

The watchdog's definition of competition in the "all-TV" market could bolster Sky's arguments in another regulatory inquiry conducted by Ofcom, which applied a narrower definition of the market when reviewing competition in the pay-TV sector.

A Sky spokesman said: "We find it difficult to understand how a minority shareholder can exert material influence over a company's policy if it has neither board representation nor enough shares to block a special resolution. This becomes even more difficult to understand when that shareholder has offered to give up all voting rights. It is not clear today whose interests are served by rejecting that offer."

Filippo Pietro Lo Franco, an analyst at JP Morgan, said: "There is no precedent for such action in the UK, especially insisting that Sky crystallise a loss on the purchase after it stayed within the letter of the law."