Watchdog to consult Sky after ruling ITV stake is uncompetitive

The Competition Commission appears to be on the verge of forcing Rupert Murdoch's Sky to sell down its holding in ITV after arguing that the pay-TV company's majority stake in its rival broadcaster restricted competition and was against the public interest.

The regulator said yesterday that it would consult Sky's management over the coming weeks over options to address its concerns about the pay-TV company's influence over its rival. The options include a full sale of the company's near-18 per cent stake in ITV, a partial sale or a series of behavioural remedies to limit Sky's influence.

However, despite a whirlwind of criticism of Sky's behaviour after the acquisition of a majority stake in ITV last December, the competition watchdog was only concerned that the size of its stake gives it the power to influence the free-to-air broadcaster's ability to raise funds for acquisitions or content production. It dismissed concerns that Sky's move threatened the plurality of UK media in areas such as advertising, sports rights and news provision, arguments that had led Sir Richard Branson to claim the ITV stake purchase amounted to a "threat to democracy".

Peter Freeman, chairman of the Competition Commission, said: "As a pay television operator, BSkyB faces competition from the free-to-air TV offer, of which ITV is an important part. BSkyB would therefore have both the ability and the incentive to take advantage of opportunities to weaken ITV or prevent it from taking actions that would threaten BSkyB's interests."

Sky is likely to take a financial hit as a result of the ruling as ITV's share price is much lower than the 130p it paid to snap up the stake. The company's decision to pay over the odds for the stake was interp-reted as a move to block NTL:Telewest – now Virgin Media – from acquiring the broadcaster, but Sky has always argued that it was a strategic investment in what it considered to be an undervalued competitor.

It is likely to argue that it would not block the company from raising funds to invest in its strategy as it would in effect be devaluing its investment. However, analysts said it was likely that Sky would be forced to reduce its stake to 15 per cent, or even below 10 per cent, to appease the regulator.

The watchdog aims to deliver its final report to John Hutton, Secretary of State for the Department of Business, Enterprise and Regulatory Reform, by early December, with a formal ruling made by the minister by early January.

The decision has reignited takeover talk around ITV, with RTL, owner of Channel 5, and Virgin Media considered the most likely bidders. Yet while ITV has had a resurgence of confidence since poaching Michael Grade from the BBC, Virgin Media's prospects have diminished over the past year after a bruising battle with Sky on several fronts.

Anthony Woolich, a competition partner at the law firm LG, said: "Even if Sky makes a loss on the sale, it may well have achieved its commercial objective in blocking Virgin Media's proposed acquisition. Sky may have lost the battle but they have probably won the war."