BSkyB's purchase of a 17.9% stake in Britain's biggest free-to-air commercial broadcaster ITV restricts competition and is not in the public interest, the country's competition regulator said.
The Competition Commission said on Tuesday, in its provisional findings, that it would now consult on possible remedies, including forcing BSkyB to sell the stake.
Britain's dominant pay-TV firm BSkyB, which has Rupert Murdoch as its chairman and son James as chief executive, spent 940 million pounds ($1.9 billion) buying the stake last November in a move that effectively blocked cable group NTL – since relaunched as Virgin Media -- from buying ITV.
Shares in BSkyB were down 0.07% at 683.5 pence, while ITV's shares were up 2% at 103.3 pence but well below the 135 pence that Sky paid.
The Competition Commission said the stake could lead to a substantial lessening of competition by giving BSkyB the ability to influence or weaken ITV's strategy.
"As a pay-TV operator, BSkyB faces competition from the free-to-air TV offer, of which ITV is an important part," the Commission said.
"BSkyB would therefore have both the ability and incentive to take advantage of opportunities to weaken ITV or prevent it from taking actions that would threaten BSkyB's interests," the inquiry's chairman, Peter Freeman, said in a statement.
The regulator said, however, it did not think the stake gave rise to competition concerns in other areas, such as advertising and news provision.
The Commission plans to send its final report to John Hutton, the secretary of state for business, by early December and analysts and competition lawyer Becket McGrath told Reuters it was now likely BSkyB would have to at least reduce its stake.
BSkyB declined to express a view on the Competition Commission's findings, saying only that it would continue to engage with the Commission during the remainder of the process.
ITV, which had previously expressed concern that BSkyB could block decisions as not all ITV shareholders turn out to vote, said it welcomed the findings and looked forward to working with the Commission to address the issue.
Analysts at UBS said the news could renew bid talk for ITV although it pointed out that ITV was trading on 23 times earnings per share with limited macroeconomic and regulatory visibility.
ITV has also stabilized in the last year after appointing industry veteran Michael Grade as executive chairman while Virgin Media has struggled since relaunching and analysts believe the free-to-air broadcaster is now more likely to preserve its independence.