Proposed merger of Carlton Communications plc and Granada plc

No. ME/1645/02

A report under section 125(4) of the Fair Trading Act 1973 on the advice of the Director General of Fair Trading, given on 11 February 2003, to the Secretary of State for Trade and Industry under section 76 of the Act

Please note that the full text of the decision can be downloaded by using the link on the right. What follows are extracts from the advice regarding the jurisdiction, parties, background and the conclusion.

JURISDICTION

The merger satisfies the assets test of the FTA. It also satisfies the share of supply test in respect of the supply of television advertising airtime. The ECMR does not apply.

It is proposed that the merger should take place in two phases to take account of the ownership restrictions of the Broadcasting Act 1990, which should be removed by the Communications Bill as drafted. The first phase would involve the merger of Granada's business with all of Carlton's business except for the regulated businesses, which would be placed in a separate entity. Following enactment of the Communications Bill and lifting of the Broadcasting Act restrictions on ITV ownership, the second phase of the transaction would add Carlton's regulated businesses to the merged entity.  For purposes of this analysis, and with the agreement of the parties, the merger in contemplation is the entire transaction. Issues arising from the Broadcasting Act restrictions are not considered here since the transaction is conditional on those restrictions being lifted by Parliament.

THE PARTIES

Granada plc (Granada) operates seven of the fifteen regional ITV licences (Anglia, Border, Granada, LWT, Meridian, Tyne Tees and Yorkshire), an airtime sales house for nine ITV licences (its own seven licences, together with Ulster and Channel) and several programme production companies. It also has shareholdings in SMG (holder of the two Scottish ITV licences), GMTV, ITV2, ITN, ITV News, London News Network, Granada Sky Broadcasting and Manchester United TV. The group had a turnover of £1,486 million and a profit of £167 million in the year ending 30 September 2001. Its gross assets at that date were £2,288 million.

Carlton Communications plc (Carlton) is a television group operating four ITV licences (HTV, Carlton, Central and West Country), an airtime sales house representing its four licences and the two SMG licences, a number of content production companies, books and video/DVD production. It also has shareholdings in GMTV, ITV2, ITN, ITV News and London News Network. The group had a turnover of £1,035 million and a profit of £90 million in the year ending 30 September 2001. Its gross assets at that date amounted to £2,074 million.

BACKGROUND

The CC considered and reported on proposed mergers between Carlton, Granada and United News and Media in July 2000 (the CC Report). Those merger situations differed from the virtually total merger of ITV now under consideration. The CC recommended prohibition of a Carlton/UNM merger on the grounds that a single entity in control of more than two of the four large ITV licence areas (Carlton, LWT, Central and Meridian) would increase advertising prices and, because advertising budgets were fixed, this would lead to an increased share of overall ITV advertising revenue. Following the CC report, United News and Media's ITV licences were split between Carlton and Granada.

CONCLUSION

The proposed merger between Carlton and Granada raises competition concerns principally in relation to the sale of TV advertising. The merger would greatly increase concentration in TV advertising, leaving one firm with more than half of national TV advertising revenue. This would be a large increase in concentration in an already concentrated market. The key question is whether a substantial lessening of competition would result from this increase in concentration.

Carlton and Granada have offered two main arguments why competition will not be substantially lessened despite the increase in market concentration. The first is that Carlton and Granada do not significantly compete at present in the supply of TV advertising. Apart from the London area their franchises do not overlap. Nevertheless, there is evidence to suggest that the parties do compete to some degree at least in London, if not more generally. 

Second, Carlton and Granada have argued that because regulation already restricts the supply of ITV advertising, there is therefore no scope for hypothetically enhanced market power profitably to raise price by restricting it further: indeed, regulation stipulates the total supply of advertising airtime. But even if total ITV advertising airtime were fixed, it is possible that the merger would create the incentive and opportunity for the prices of many advertising slots (and hence impacts) to be increased ? namely those for slots/impacts for which demand is relatively insensitive to price. While the prices of other slots might decrease (so as to fill the aggregate amount of advertising airtime) the consequence could be an increase in the average price of TV advertising.

For these reasons, it would not be safe to conclude that the merger would not lessen competition in TV advertising substantially. Whether or not it may be expected to do so requires further examination of a kind that only the CC is able to do.

Finally, the merger raises secondary competition questions in relation to other activities related to TV broadcasting ? potential competition for ITV licences, and the supply of studio facilities in Northern England.  Although possible concerns in these areas might not individually have given sufficient grounds to recommend that the merger be referred, the CC may wish to give them careful consideration.

I therefore conclude and recommend that you should refer this merger to the Competition Commission.

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