01 Dec 1999

There was a collective stunned silence and then a growing roar of outrage after the British Labour Government decided to pick two recent deals, that appear to be economically unobjectionable, for referral to the competition authority.

The first on the hit list is NTL's plan to buy the residential cable business of Cable & Wireless. The plan is for NTL, which is backed by investment from France Telecom, to acquire Cable &Wireless' cable business Cable and Wireless Communications (CWC), creating the largest cable firm in the UK with 2.8 million customers.

Second is French water-to-media company Vivendi's acquisition of nearly 25 per cent of UK satellite television company BSkyB. Trade and industry minister Stephen Byers says he referred the NTL buy because the number of big cable television companies will fall from three to two, which could impact competition. And, he says that the Vivendi deal could have effects in the markets for programming and set-top boxes (STBs) because Vivendi is also a major shareholder in French pay-TV giant Canal+.

I say that Mr Byers either doesn't understand the pay-TV market in the UK, or he has been listening too intently to the folks down at Sky's Isleworth HQ, whose interest will be well-served by delays on either of these two deals. A bigger NTL will pose a threat to Sky in terms of its financial clout, subscribers served and, therefore, its ability to bid against Sky for all-important sports rights, the big pay-TV driver. And, Murdoch is pretty keen to get those rights. An offer of £1 billion for exclusive Premier football league rights for the next three years was supposedly tabled quietly by Sky in late October.

Byers has, in fact, got it wrong. Firstly, UK cable companies hold exclusive franchises in different parts of the country, so merging two of them does not decrease competition in any one area. Secondly, the UK cable market is in need of consolidation in order to put up any reasonable fight at all against BSkyB.

Sky's national footprint through its satellite dishes and its better customer service (also delivered on a national basis) have given it crucial ammunition and made it the dominant pay-TV company. The need for a strong cable business is even more important as the clock ticks down to 2001, the date when BT will be able to offer not only telephone and Internet services, but also pay-TV services down its telephone wires, just like the cable companies.

Ever since Vivendi purchased its sizeable stake in Sky earlier this year, 40 per cent owner Rupert Murdoch has been running a rear guard action to convince the world that he is still in charge at the British pay-TV company, which, as a matter of fact, he is. The heat being put on Murdoch by Vivendi boss Jean-Marie Messier is all the more fun to watch because of what it follows.

Earlier in the year, Murdoch had flown to Paris and proposed a merger with Canal+, which was rebuffed, largely by French politicians fearing cultural intrusion but also clearly with Vivendi's blessing. The difference here is that Messier's 25 per cent is not the same as a merger. A merger or a near majority control should be looked into by competition hounds, but that is then and this is now.

So, if the economics don't add up to investigation, look to politics.

Certainly, the plot thickened when soon after the referral, a senior MP was seen lunching with BSkyB chief executive officer (CEO) Tony Ball, a practice that is barred when a company is involved in a referral. Sky says the lunch was booked in advance of the referral and that the two men did not discuss it. Perhaps more worrying than this apparent flaunting of the rules, is the fact that Byers acted against his own advisors at the Department of Trade and Industry and the Office of Fair Trading, which formed its opinions based on advice from officials at the television regulator the ITC, as well as the telecoms regulator Oftel.

The Financial Times newspaper said the referrals did "regrettable damage to the credibility of the competition regime," not to mention awaking suspicion that these were politically motivated.

The combined power of The Sun newspaper and The Times, both owned by Murdoch's News Corp. is formidable in political terms. Maybe the referrals were a sort of quid pro quo for Byers earlier decision - which at the time also surprised the market - to rule against BSkyB's proposed acquisition of soccer club Manchester United.

French newspaper Le Monde went further, calling the two referrals anti-French. Downing Street is using the Vivendi and NTL-France Telecom deals as part of the Beef War, that has the French banning British beef from French dinner tables and the British claiming that French boeuf isn't clean.

Appropriately, Le Monde recently published an interview with German Chancellor Gerhard Schroeder which declared that hostile bids destroy "the culture" of the target company. He was of course referring to Vodafone-Airtouch's €240 (£153) a share bid for Mannesmann, the Dusseldorf-based engineering-to-mobile phone company.

Chris Gent, who runs Vodafone Airtouch, says that he is planning a merger, not an asset-stripping take-over. Mannesmann's CEO Klaus Esser says he has a better plan and it doesn't include a combination of the two companies.

This will be a crucial fight for the companies, but also for European capitalism.

The point here is that the shareholders on both sides of the proposed deal should be making these decisions, not the German government. And, the pity is that the UK government will have to do a pretty big twist if it wants to re-start championing the market as the arbiter in things business.