Macquarie/National Grid Wireless Merger: Competition Commission publishes final report

27 May 2008

Louise Banér

On 11 March 2008, the Competition Commission published its final report on the acquisition by Macquarie UK Broadcast Ventures Limited of National Grid Wireless Group finding that the completed acquisition, which combines the only two integrated terrestrial broadcast transmission companies in the UK would lead to a substantial lessening of competition in the provision of broadcast transmission services to television and radio broadcasters and could be expected to result in higher prices and lower service quality. However, in light of the customer benefits that could arise from the acquisition, the Competition Commission has decided to allow the merger, subject to the parties agreeing remedies.

In the past, Arqiva (a subsidiary of Macquarie UK Broadcast Ventures Limited (MUKBV) and National Grid Wireless Group (NGW) have actively competed in the field of broadcast transmission services which are provided to broadcasters as a single service combining managed transmission services (MTS) and network access (NA). The merged company will be the only national MTS/NA providers for terrestrial TV and will have a combined share exceeding 85% in relation to radio broadcasters. The Office of Fair Trading found that the merger would create a monopoly supplier in TV and radio transmission services, and referred the merger to the Competition Commission (CC) on 8 August 2007.

The report confirms the CC’s provisional findings that the completed acquisition and the resulting loss of rivalry between Arqiva and NGW, in a market in which neither the threat of entry nor buyer power is sufficient to prevent the merged entity from exercising market power, would lead to a substantial lessening of competition. The report states that the merger may be expected to result in:

  • higher prices and/or lower service quality and reduced innovation in the provision of MTS/NA under existing contracts with television broadcasters;

  • higher prices and/or lower service quality in the provision of MTS/NA to television broadcasters with respect to new national Digital Terrestrial Television (DTT) or sub-national DTT contracts;

  • higher prices and/or lower service levels and reduced innovation in the provision of MTS/NA in the relevant radio market under existing contracts;

  • higher prices and/or lower service quality in the provision of MTS/NA in the relevant radio market in relation to new licences, and

  • higher prices and/or lower service quality in the provision of MTS/NA in the relevant radio market in some cases where existing contracts expire and are renegotiated.

However, digital switchover requires the re-engineering of all UK broadcast sites to enable a complete switchover from analogue television to DTT by 2012. The CC considers that the context of the merger, within this critical time frame, is unique and that although full divestment or substantial divestment of NGW’s MTS/NA business (which the CC favours over full divestment as it is a less intrusive remedy) would both be effective in addressing the competition problems, divestiture could jeopardise the digital switchover process and result in significant costs for customers. On the contrary, a package of behavioural remedies would address the adverse effects on competition whilst also limiting the risk of extra costs on third parties and preserving the relevant customer benefits.

Arqiva’s proposed package of behavioural remedies ensures that approximately £165 million is passed back to broadcast customers as a result of the merger (net present value calculated to 2020) and includes in particular:

  • an immediate price discount of 17 per cent to all radio broadcast customers;

  • an immediate price discount of 3.25 per cent to all analogue and low-power DTT customers;

  • a price discount to high-power DTT customers worth £44 million through to 2020 and £72 million to 2032 (net present value);

  • renewals and new contracts to be based on the same prices and terms as existing contracts or determined on cost-oriented and fair, reasonable and non-discriminatory (FRND) terms;

  • an annual audit of digital switchover costs to ensure that costs are appropriately incurred, allocated and recorded; and

  • the appointment of an industry adjudicator to resolve disputes, in particular ensuring that new services are offered on cost-oriented and FRND terms.

The CC considers that a package of behavioural remedies similar to Arqiva’s has a high probability of effectively addressing the adverse effects of the merger, but stresses that if the parties fail to propose a satisfactory package of behavioural remedies, it will order the divestiture of NGW’s entire MTS/NA business. Although the CC recognises the Office of Fair Trading’s role in monitoring any undertaking given by the parties, it also welcomes Ofcom’s suggestion that it is likely, in due course, to conduct its own market review of the provision of broadcast transmission services under the Communications Act 2003.

Source: Competition Commission News Releases 65/07, 07/08 and Final Report found at http://www.competition-commission.org.uk.