BSkyB Screens Interest in ITV Stake

By Kate Holton and Georgina Prodhan

LONDON (Reuters UK) - Pay-TV group BSkyB lost an appeal to keep hold of its stake in ITV on Monday, in a ruling which could cost it hundreds of millions of pounds and potentially make free-to-air broadcaster ITV a bid target.

BSkyB had challenged an earlier ruling by regulator the Competition Commission forcing it to reduce its 17.9 percent stake in ITV to below 7.5 percent. But the appeal was rejected by the Competition Appeals Tribunal.

"In our view there is no substance in Sky's complaint," the tribunal said in a written judgement, rejecting Sky's arguments that the Commission should have imposed some lesser remedy.

BSkyB can still appeal to the Court of Appeal and it said it would consider its next steps in due course.

ITV welcomed the ruling.

BSkyB bought the stake in 2006 for 135 pence a share or 940 million pounds in a deal which effectively blocked cable group NTL -- now named Virgin Media -- from buying ITV.

With ITV's shares closing at 41 pence on Monday, BSkyB's stake is now worth less than 300 million pounds.

The tribunal also accepted one of a number of arguments from Virgin Media, which had wanted BSkyB to be ordered to sell its whole stake, and said it would hear further arguments from the parties to decide whether further remedies were necessary.

The tribunal said ITV should be considered a single entity for the purpose of ensuring sufficient plurality of opinion in the public interest, and rejected notions of "internal plurality" due to BSkyB's presence as an ITV shareholder.

The parties will now have to submit arguments regarding the Virgin Media appeal by October 6 and if there is a hearing it will be held on October 15.

Virgin Media said in a statement: "ITV's independence has been compromised for nearly two years as a result of Sky's actions. We've consistently maintained that this undermined the plurality of the UK's media."

Becket McGrath, EU and Competition Partner at Berwin Leighton Paisner LLP, said: "The merger has already been blocked on competition grounds, so it shouldn't make any difference (if) it should also have been blocked on plurality grounds.

"On the other hand, Virgin may argue that ... Sky should be made to sell down below the 7.5 percent level," he added. "I don't think the latter approach is correct ... Virgin may still have a go, however."

"THREAT TO DEMOCRACY"

The ruling is the latest twist following the controversial purchase which pitted the Murdoch family against famous entrepreneur, Richard Branson.

The move, spearheaded by then BSkyB Chief Executive James Murdoch, prompted a slanging match between the two sides, with Virgin Media's largest shareholder Branson labelling Sky and the Murdochs a threat to democracy.

BSkyB has always maintained that it acted within the Communications Act, which prevents it from owning more than 20 percent of ITV due to its other media interests.

It also argued that the Competition Commission made mistakes, including in its decision that a merger had effectively occurred between the two companies and that the investment prevented ITV from pursuing an independent competitive strategy.

BSkyB also offered to give up all its voting rights which it said would prevent it from influencing strategy.

The presumption that BSkyB would have to sell down its stake had caused ITV's shares to edge higher in recent weeks on speculation that any sale could lead to a full bid.

Europe's biggest commercial broadcaster RTL, Italy's Mediaset and "Big Brother" maker Endemol, part owned by Mediaset, have all been linked with the company.

But most analysts are sceptical.

"We can certainly see the attractions for an investor with a long-term investment horizon buying a 10 percent stake," said analysts at Numis on ITV, the home to soap opera "Coronation Street."

"However, a full bid for ITV could cost in excess of 4 billion pounds (equity value 2.5 billion pounds at 65 pence per share, 700 million pounds debt, pension buyout 1 billion pounds) which would be difficult to fund in these markets, particularly given the uncertain advertising outlook."

(Editing by David Holmes and Jon Loades-Carter)