EU General Court orders fresh review of Liberty Global/Ziggo merger

The EU lower court has overturned a 2014 merger clearance by the European Commission (EC) following an appeal by a third party. 

Overturning the clearance does not mean that the deal is now prohibited. Instead, the case goes back to the EC, and the parties have to re-notify. At best this is time-consuming for them; at worst the EC review could lead to adverse findings. Hypothetically, at least, the EC could prohibit the deal, or impose further conditions on it. 

The EU General Court annulled¹ the approval of the Liberty Global/Ziggo transaction for the EC’s failure to explain adequately the view taken by it that premium pay-TV sports channels should be excluded from its analysis. KPN, a third party, had raised concerns which the EC failed to address. The annulment is one of only four² examples of a clearance decision being overturned, and shows the importance attached to protecting third parties. 

This protection for third parties, however, may come at the expense of uncertainty for the deal parties. The greater caution which the EC must show inevitably leads to proliferation of information requests, and longer reviews. A recent clearance decision ran to 915 pages, with approval issued almost 15 months after the deal was first announced.³ 

Although the EU merger regulation sets strict deadlines for the formal investigation of mergers, real review schedules have grown ever-longer over the years. Preparations for filing should begin in earnest at the earliest possible stage; and long stop dates for closing should allow plenty of leeway. 

Background 

On 26 October 2017, the EU General Court annulled the EC’s 2014 conditional clearance of the €10 billion acquisition by Liberty Global of Ziggo, which combined the Netherlands’ two largest cable networks. Together, Liberty Global’s UPC subsidiary and Ziggo now account for around 70% of Dutch pay-TV subscriptions. The only rival with competing network coverage is KPN, the former Dutch phone monopoly. 

The EC opened an in-depth investigation of the transaction in May 2014 over concerns that the proposed merger would lead to higher prices for premium pay-TV film channels. The EC had also identified a risk of reduced innovation, to the detriment of consumers, for so-called over-the-top (OTT) services in the delivery of audiovisual content over the internet.⁴ However, during the investigation, KPN raised further concerns about possible negative vertical effects on the narrower market for pay-TV sports channels. Since Liberty Global was the wholesale supplier of one of the two pay-TV sports channels, KPN, a downstream competing distributor, feared the proposed concentration might foreclose access to that input on the downstream market. 

In its decision the EC acknowledged that the market for the wholesale supply of pay-TV channels could be further segmented into pay-TV film channels and pay-TV sports channels. Nevertheless the EC assessed the effects of the concentration only on the wider market for premium pay-TV channels and on the possible narrower market for pay-TV film channels.⁵ In 2015 KPN filed a legal challenge against the EC’s decision not to carry out a proper investigation into the vertical impact of the deal on the market for pay-TV sports channels. 

The EU General Court Judgment 

The EU lower court ruled that the EC could leave open the definition of the relevant product market, provided it “clearly and unequivocally” demonstrates in its decision that the concentration will not lead to anticompetitive effects on any of the possible market definitions. The decision must disclose the EC’s analysis in such a way as to enable the persons concerned to ascertain the reasons for the decision and to provide the court with adequate material for it to exercise its judicial review. This is the second judgment this year that emphasises the need for procedural safeguards. In March 2017 the General Court annulled the EC’s decision in UPS/TNT Express⁶ because the EC failed to reveal to the parties the econometric model on which it based its prohibition of the merger. 

In its defence, the EC submitted that the decision expressly stated that Liberty Global did not have the ability to foreclose the market because it did not have any upstream market power, since it owned only one of the two premium pay-TV sports channels. However, the General Court rejected this justification, considering that the mere existence of a competitor, in the absence of a more detailed analysis of the relevant market positions and competitive relationships, could not in itself rule out the possibility that Liberty Global may have upstream market power. 

In its submissions to the court the EC argued that the need for speed, the short timescales for examining concentrations, and the low probability of vertical anti-competitive effects justified its decision not to assess the vertical effects on the possible market for premium pay-TV sports channels. Rejecting the argument, the General Court emphasized that leaving the market definition open, for example due to time constraints, does not relieve the EC of its obligation to explain, “at least briefly”, why there could be no vertical competition concerns on a possible market. 

The EU lower court also rejected the EC’s attempt to remedy the situation by providing numerous arguments during its pleas showing that Liberty Global did not have the ability to engage in a foreclosure strategy. The court stated that such arguments must be set out in the decision itself. Moreover, the EC cannot argue that the decision implicitly addressed KPN’s concerns. 

Key Takeaways: 

• Liberty Global (and its Ziggo subsidiary) face uncertainty amid fresh scrutiny three years after the acquisition was implemented. While EU merger rules do not require the deal to be unwound, the EC has to readopt its decision including a well-reasoned analysis of the possible vertical foreclosure effects on the market for premium pay-TV sports channels, in light of competitive conditions today. As markets may have changed since 2014, new review by the EC may lead to further divestments of pay-TV assets by the parties or even (theoretically at least) to a prohibition. 
• Sufficient statement of reasons is an essential procedural requirement. In Liberty Global/Ziggo the EC’s failure to explain clearly the reasoning behind the clearance of the merger deprived third parties of the ability to understand and, if necessary, challenge the decision. 
• Although the EU merger regulation sets strict deadlines for the formal investigation of mergers, real review schedules have grown ever-longer over the years. While the protection of procedural rights is a vital safeguard, in particular given the EC’s role as prosecutor, judge and jury, the protection can boomerang. Defensive tactics by the EC, seeking to ensure its work is appeal-proof, have led over the years to ever-lengthening review timetables. Pre-filing discussions now routinely last for months in substantive cases, even before the formal timetable is triggered by formal notification. And the EC resorts frequently to timetable suspensions pending satisfaction of additional requests for information. 
• The lesson to be drawn is that preparations for filing should begin in earnest at the earliest possible stage; and the long stop dates for closing should allow plenty of leeway. 

Footnotes 

_{1) Judgment of 26 October 2017 in Case T-394/15 KPN v Commission (the Judgment).
2) Cases C-68/94 [1998], France and Société commerciale des potasses and de l'azote and Entreprise minière and chimique v Commission; T-156/98 [2001], RJB Mining v Commission; T-119/02 [2003], Royal Philips Electronics v Commission; T-464/04 [2006], Impala v Commission (the Court of Justice annulled the General Court decision on appeal).
3) Case M.7932 Dow/DuPont, 27 March 2017.
4) Case M.7000 – Liberty Global/Ziggo.
5) The EC worried that the deal would reduce competition for wholesale premium pay-TV film channels by bringing together Film1 and HBO Nederland. To address these concerns, Liberty Global agreed to divest Film1 and pledged to refrain from hindering OTT streaming of television programs on the Internet, either by contractual or technical means.
6) Case T-194/13 United Parcel Service, Inc. v Commission.}