Vodafone and Sky are due to discover in days whether they will be allowed to join forces and create a formidable pay TV and telco provider.

New Zealand's competition regulator has been wading through hundreds of pages of arguments on the deal, which would combine Vodafone's mobile and fixed telecommunication networks with Sky's dominant position in the pay TV market.

If approved by the Commerce Commission, the merger would mean the combined business could offer consumers enticing bundles of Sky TV and Vodafone's internet and mobile services.

However, those opposed to the deal believe it will reduce competition in the telco market, which is not allowed under the Commerce Act.

Advertisement
Vodafone chief executive Russell Stanners would head the merged business. Photo / Greg Bowker
Vodafone chief executive Russell Stanners would head the merged business. Photo / Greg Bowker

The merger would see Sky TV buy Vodafone NZ for $3.44 billion, funded by a payment of $1.25b in cash and the issue of new Sky TV shares at a price of $5.40 per share. Vodafone would in turn become a 51 per cent majority shareholder in Sky TV, in what amounts to a reverse takeover.

Sky would then borrow $1.8b from Vodafone to fund the purchase, repay existing debt and for working capital.

Vodafone chief executive Russell Stanners would head the merged business.

The Commission released a letter in November which raised concerns about the merger, and the potential for competition issues in the telco market.

The new company would have substantial market power by virtue of its portfolio content, which included rights to live rugby, the commission said.

The merger would also make buying Sky on a standalone basis relatively less attractive than buying it in a bundle, resulting in customers switching from rival telcos.

The commission was further concerned that rivals would not be able to offer bundles that included Sky.

"As a result of the above, one or more rivals may lose customers to such an extent that they no longer provide an effective constraint in a telecommunications market, allowing the merged entity to profitably raise prices of a telecommunications service above levels that would prevail in the counter-factual," the regulator said.

In response, Vodafone said the commission's concerns were unfounded, arguing that the merger would need to result in "monumental change" in telecommunications markets to risk substantially lessening competition.

It said New Zealand's telecommunications markets were highly competitive, and adding Sky TV into the mix would not substantially drive the uptake of broadband or mobile services.

"Even if this were the case, the merged entity will (and will be incentivised to) offer wholesale Sky and retail standalone Sky," Vodafone said.

Sky Television CEO John Fellet. Photo / Jason Oxenham
Sky Television CEO John Fellet. Photo / Jason Oxenham

"Existing and potential market participants will not, in any case, be driven below competitive scale. The market will remain as competitive as ever."

It further pointed out that other telcos also sold broadband packages, such as Spark offering Lightbox and Spotify, and Trustpower's electricity bundles.

In its response, Sky argued that rival telecommunications companies would provide an effective competitive constraint on the merged entity.

"The Commission's theory of harm, under which the merged entity drives so many customers away from rival telecommunications providers that they are no longer able to provide an effective constraint on the merged entity, does not hold," the company said.

It added that it would continue to have incentives to sell its pay TV service as a standalone product.

"However, even putting those incentives aside, rival telecommunications providers do not, and will not, need access to the premium live sports rights held by Sky in order to effectively compete in New Zealand's telecommunications markets," the company said.

"Any changes in New Zealand's telecommunications market shares that could result from the proposed transaction will not be of a magnitude that could be described as a substantial lessening of competition."

Spark New Zealand chief executive Simon Moutter. Spark and 2Degrees have formally opposed the merger. Photo / Dean Purcell
Spark New Zealand chief executive Simon Moutter. Spark and 2Degrees have formally opposed the merger. Photo / Dean Purcell

Spark and 2Degrees have formally opposed the merger, saying the deal would adversely affect consumers as a result of creating a company willing and able to use premium live sports content to stifle competition.

Concerns have also been raised by TVNZ, the Telecommunications Users Association of New Zealand, InternetNZ, Trustpower and others.

Earlier this week, Spark, Trustpower and InternetNZ asked the firms to hold off completing the merger for a few days, should they gain the Commerce Commission's approval. They wanted time to weigh up the decision and lodge an appeal.

Spark chief executive Simon Moutter said if the deal was approved, it would have "a profound impact on the industry structure and industry playing field" and would warrant a "meaningful" response.

Sky rejected the request, saying it did not see "any proper basis for seeking an interim stay from the courts".

"Sky has full confidence in the New Zealand Commerce Commission and its processes," Sky said. "In the event the NZCC provides clearance in respect of the proposed merger, Sky intends to proceed to completion in an orderly manner upon satisfaction or waiver of any outstanding conditions."

The Commission is expected to release its decision on Thursday.

The issues

What the Commerce Commission needs to assess:

• Is the merger likely to substantially reduce competition in a market?

• Would the merged business be able to raise prices or reduce quality?

• Would the merged entity be able to render its rivals less able to compete?

Vodafone
• 2016 revenue: $1.96 billion
• More than 3000 staff

Sky
• 2016 revenue: $929 million
• About 1500 staff