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Australia – FOXTEL/AUSTAR Acquisition Complete.

28 October, 2012

 

Legal News & Analysis – Asia Pacific – Australia – TMT

 

Implications for the subscription television services, audio visual content and telecommunications industries

 

In brief

 

  • On 25 May 2012, FOXTEL Management Pty Limited (“FOXTEL“) completed its acquisition of AUSTAR United Communications Limited (“AUSTAR“), following a lengthy merger review process conducted by the Australian Competition and Consumer Commission (the “ACCC“).
  • In order to secure regulatory clearance of the transaction, FOXTEL offered (and the ACCC accepted) a court-enforceable undertaking which prevents FOXTEL from, among other things, obtaining certain exclusive content rights.

 

Background

 

On 26 May 2011, FOXTEL announced its proposal to acquire AUSTAR by way of a Scheme of Arrangement – a transaction valued at approximately $2 billion.

 

FOXTEL is Australia’s largest subscription television services provider and, prior to the transaction, provided services to over 1.6 million households in predominately metropolitan areas of Australia. AUSTAR was a subscription television services provider to over 750,000 subscribers in mainly rural and regional areas in Australia, as well as the Gold Coast, Darwin and Hobart.

 

The transaction was formally entered into by the parties on 11 July 2011 and was subject to a condition precedent requiring approval by the ACCC pursuant to section 50 of the Competition and Consumer Act 2010 (Cth) (the “Act”). Section 50 of the Act prohibits any acquisition of shares or assets that would have the likely effect of substantially lessening competition in any market in Australia.

 

ACCC review and competition concerns

 

The ACCC’s review process took an unusually long time, commencing on 26 May 2011 and completing on 10 April 2012. As part of that process, the ACCC received submissions from various industry participants, including subscription television providers, free-to-air (“FTA“) television operators, content owners and telecommunications companies. On 22 July 2011, the ACCC published a Statement of Issues, outlining its preliminary views on the proposed transaction, namely, that the transaction would likely result in a substantial lessening of competition in:

 

  • the national market for the supply of subscription television services;
  • the national market for the acquisition of audio visual content; and
  • a number of markets for the supply of telecommunications products.

 

National market for subscription television

 

The ACCC was concerned that because FOXTEL and AUSTAR are the only significant providers of subscription television services in Australia, the proposed merger would create a near monopoly subscription television provider across Australia. In particular, the ACCC considered that:

 

  • significant technological developments (eg the use of Internet Protocol Television (“IPTV“) and delivery of content to internet-enabled devices such as gaming consoles); and
  • significant industry changes which are likely to occur in the foreseeable future, including the rollout of the National Broadband Network (“NBN“),

 

have the potential to facilitate expansion and/or entry by FOXTEL and AUSTAR into new product and geographic markets, thereby increasing competition between them.

 

National market for acquisition of audio visual content

 

The ACCC’s preliminary view was that there was likely to be a substantial lessening of competition in the market for the acquisition of audio visual content, as a flow-on effect from the lessening of competition in the national market for the supply of subscription television services (ie fewer subscription television providers will directly lead to fewer buyers of content).

 

Telecommunications markets

 

The ACCC’s preliminary view was that the proposed acquisition was likely to substantially lessen competition in a number of telecommunications markets. The ACCC highlighted the increasing importance of telecommunications and broadband competitors being able to provide a bundle of three or four services to consumers (including fixed line telephone, mobile telephony, subscription television and broadband internet services), particularly after the rollout of the NBN.

The ACCC also thought that Telstra, through its 50% shareholding in FOXTEL, would be well placed to provide such bundled services. Other telecommunications providers and internet service providers reportedly raised concerns that because they lack corporate or commercial links to subscription television providers of substantial scale, they would be at a disadvantage relative to Telstra in being able to provide consumers with a bundle of services.

 

Following the release of the Statement of Issues, the parties were given an opportunity to provide further submissions and conduct further negotiations to attempt to allay the ACCC’s competition concerns. In fact, the ACCC delayed its proposed decision three times to allow the parties to explore whether a negotiated outcome could be reached.

 

FOXTEL’s court-enforceable undertaking

 

To address the ACCC’s competition concerns (which FOXTEL did not agree with) and to avoid further delays to the transaction, FOXTEL offered a court-enforceable undertaking under section 87B of the Act. The ACCC conducted extensive market inquiries in relation to a draft version of this undertaking. Following these inquiries, and after further discussions with FOXTEL, the nature and scope of content addressed by the non-exclusivity provisions in the undertaking were significantly broadened to obtain the ACCC’s approval.

 

The undertaking FOXTEL gave prevents it from:

 

  • acquiring exclusive IPTV rights for a range of attractive television program and movie content, including:
    •  linear channels supplied by independent content suppliers, including over 60 current FOXTEL channels and other international channels (for example Disney, ESPN and MTV); 
    • Subscription Video on Demand (“SVOD”) rights to television programs that form part of a linear channel supplied by an independent content supplier; 
    • movie linear channels (or movies for inclusion in a linear channel) from more than 50% of the eight major movie studios or more than 50% of the eight specified independent movie studios; and
    • SVOD rights to movies, except for an 18 month window in relation to new release movies acquired from the movie studios from which FOXTEL is not prohibited from acquiring exclusive linear rights; and 
  • exclusively acquiring any movie for distribution on a Transactional Video on Demand basis; and 
  • entering into any agreement that prevents a third party from acquiring mobile rights to the above content to combine with IPTV rights (ie allowing third parties to deliver a bundled package of programming across a number of devices).

 

The undertaking does not prevent FOXTEL from acquiring exclusive rights in relation to individual sports. The ACCC considered that to the extent that FOXTEL’s (and its shareholders’) ownership of exclusive sports rights may raise competition concerns, these concerns existed independently of the proposed acquisition. The ACCC stated that it will nevertheless “continue to consider whether there is a need to advocate for regulatory intervention in these markets.”

 

In the event that the undertaking is breached, the ACCC can seek orders from a court for its enforcement.

 

ACCC green light

 

The ACCC accepted FOXTEL’s undertaking on 9 April 2012 and announced that it would not oppose the acquisition on 10 April 2012. The Scheme of Arrangement was subsequently approved by the Federal Court of Australia on 13 April 2012 and the acquisition was completed on 25 May 2012. Plans for the integration of FOXTEL and AUSTAR are ongoing.

 

The new FOXTEL entity will provide subscription television services to 2.2 million households and over seven million viewers each week.

 

Lessons

 

  • Notwithstanding obvious convergence in recent years across media platforms and technology, the ACCC’s primary position appears to be that, for the purposes of Australian competition law, separate markets exist across different modes of content delivery. For example, the ACCC is of the view that subscription television and FTA television are in different markets (ie they are not closely competitive). This reflects the Federal Court of Australia’s decision in the C7 case (see: Seven Network Ltd v News Ltd (2009) 182 FCR 160 per Mansfield, Dowsett and Lander JJ; Seven Network Ltd v News Ltd [2007] FCA 1062 per Sackville J).
  • The ACCC’s view on markets has implications for the Australian Government’s Convergence Review. There is a real question to be answered – whether section 50 of the Act is adequate to protect against concentration in cross-media ownership, in circumstances where the ACCC appears likely to conclude that traditional forms of media, such as television, radio and newspapers, and dynamic forms of new media, each remain in separate markets for competition law purposes.

 

 

For further information, please contact:

 

Ross Zaurrini, Partner, Ashurst

[email protected]

 

Ben Teeger, Ashurst

[email protected] 

 

 

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