BSkyB Facing Costly Reduction in ITV Stake

British pay-TV firm BSkyB looks set to have suffered a costly blow after a regulator said it should sell more than half of its 17.9 percent stake in ITV because it is hampering competition.

At current share prices the ruling could cost BSkyB around 200 million pounds as the value of the shares has dropped since it bought them.

However, analysts say the News Corp. controlled broadcaster is likely to have succeeded in preventing any rivals from buying free-to-air operator ITV.

BSkyB, Britain's dominant pay-TV firm, paid 135 pence per share, or 940 million pounds, for its stake in ITV last November in a move that effectively blocked cable group NTL -- since relaunched as part of Virgin Media -- from buying ITV.

BSkyB called it a long-term investment at the time.

The move caused uproar, with rivals and legislators alike condemning the deal while Britain's most famous entrepreneur, Richard Branson, labeled the company a threat to democracy.

Branson is Virgin Media's largest shareholder.

ITV's shares have fallen since then, and were trading at 84.5 pence.

The Competition Commission said the stake was anti-competitive and should be reduced to below 7.5 percent. The Secretary of State for Business and Enterprise, John Hutton, has until Jan. 29 to announce a final decision.

He must accept the Commission's findings on the competition issues but he has discretion over what remedies to impose.

The Commission said on Thursday that of two possible options -- either a full divestiture or a reduction to less than 7.5 percent -- it thought the latter would be sufficient to prevent BSkyB from having any material influence over ITV's strategy.

It also said BSkyB should not seek or accept representation on ITV's board.

The Commission also revealed that BSkyB had offered to cede all its voting rights but decided this would still not fully address the substantial lessening of competition.

ITV, which welcomed the recommendation on Thursday, has previously said BSkyB should sell the entire stake or at least trim it to 4.9 percent as it could otherwise exert influence.

Pleading Innocence

BSkyB rejected the findings.

"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," a spokesman said in a statement.

"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."

Fiona Carter, a regulatory partner at law firm Browne Jacobson, said the ruling was a compromise.

"(But) Sky may feel that any financial loss they may have incurred in the process was probably worth it since it blocked Virgin Media's proposed acquisition of ITV," she said.

Most analysts believe Britain's biggest commercial broadcaster is more likely to remain independent following the appointment of industry veteran Michael Grade as executive chairman, and the current credit crunch.

"Sky may have lost the battle, but they have probably won the war," competition lawyer Anthony Woolich said recently.

Since purchasing the stake, BSkyB chief executive James Murdoch, 35, has stepped down to become head of the Asian and European operations at News Corp. Sky has said his successor, Finance Director Jeremy Darroch, was closely involved in previous strategic decisions.

Analysts at UBS said it remained to be seen whether BSkyB could find a suitable buyer for the stake in the current financial market turmoil, or whether the shares would represent a substantial overhang for ITV.

BSkyB said it would consider the report carefully and make representations to the government in due course.