Market Insight

Regulator approves Telefónica’s takeover of Canal Plus - with conditions

April 24, 2015  | Subscribers Only

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Spain’s competition regulator CNMC has approved Telefónica’s takeover of pay TV operator Canal Plus subject to conditions including a requirement to offer at least half of its premium channels to third party platforms.

The green light comes nearly one year after the telecommunications giant announced the acquisition of Prisa’s 56% stake in Distribudora de Television (DTS), the parent company of Canal Plus Espana. The deal was valued at €725 million ($785 million). Telefónica already owned a 22% stake in DTS acquired from Mediaset Espana for a reported €295 million. The May 2014 deal triggered an immediate investigation by CNMC. Telefónica will emerge with an estimated 3.6 million pay TV subscribers in Spain - a 70% market share. The takeover was opposed by rival telcos Orange and Vodafone.

Telefónica is expected to pay an additional €10 million to Mediaset at the completion of the acquisition of Canal Plus, along with an additional as-yet undisclosed figure determined by the company’s future performance. With the additional fees, this deal the total price of Telefónica’s acquisition is estimated at €1.06 billion.

The terms of the agreement with the CNMC specify that Telefónica must make an array of premium content available to competitor companies. This includes the following sporting events: Primera Liga and Copa del Rey football, the Champions League and the Europa League, the FIFA World Cup finals, the World Basketball Championship, Formula 1, Moto GP and the Olympics. Alongside this, Telefónica must also make premium channels - defined as channels which carry exclusive content from major US studios - available as part of their wholesale offering.

From this range, rival pay TV operators may purchase up to a maximum of 50% of the available content, Telefónica will not be allowed to impose restrictions on the content mix and wholesale prices must be set to allow competitive retail pricing of the same content across Telefónica and its rivals.

The CNMC has also placed restrictions on Telefónica in regards to its own acquisition of content. Telefónica will not be permitted to hold exclusive rights to content for more than two years or any period of time for video-on-demand content; it must limit all acquisition agreements to three years and must forgo any first refusal rights. The figure of 50% content figure is notably lower than the 75% rival operators Orange and Vodafone petitioned the regulator for. In order to offset the risk associated with the acquisition of expensive content rights however the regulator has instructed that the cost of content deals should be shared between all pay TV operators which buy the channels at wholesale; it is not clear however how this process will work in practice.

As well as restrictions on content, Telefónica also faces new controls on its growing fibre infrastructure. The CNMC told the operator that it should open its fibre network to third party operators for both ISP and IPTV provision, with stipulations that the infrastructure should provide sufficient capacity to ensure a consistent service regardless of operator choice.

Our analysis

The acquisition of Canal Plus will extend the reach of Telefónica’s television offering through the addition of satellite. Spain’s pay TV market remains relatively small by western European standards, with pay TV penetration at 20% at the end of 2014 according to IHS Technology. However, multiplay forms a significant portion of the existing market, with several operators offering bundled services. Outside of the mobile operators Telefónica, Vodafone, and Orange, multiplay services are available from cable operators, the largest of which are Ono and Euskatel, and local loop unbundled operator Jazztel.

Canal Plus subscriptions have remained largely static with the number of customers rising through 2005 to 2007 rising at a compound annual growth rate of 2%, reaching a peak subscriber base of 2.1 million customers. In 2008 the company’s annual net additions entered into a prolonged period of decline with an average 3% decline year-on-year, levelling in 2014 where net additions rose for the first time in six years (by a modest 0.25% or 4,000 subscribers). Telefónica, in contrast, has enjoyed strong growth between 2004 and 2011 with year-on-year net additions rising at a compound annual growth rate of 22% over the period. However, after reaching 833,000 customers at the end of 2011, subscribers fell by 19% to 673,000 at the end of 2013. In 2014, aggressive promotion of triple play bundles saw the platform return to growth with an increase of 410,000 or 20%. IHS forecasts show the combined television revenues of Telefónica and Canal Plus in their pre-acquisition state at €2.1 billion last year, with Canal Plus equating to €1.2 billion and Telefónica’s IPTV platform making €912 million.

The agreement will create the strongest pay TV content library in Spain. Telefónica has rights to motorsports events Formula One and Moto GP as well as the Spanish national football teams’ qualifiers for Euro 2016 and the 2018 World Cup. Telefónica has also agreed a one year TV rights deal (for the 2015/16 season) with FC Barcelona and three other first division football clubs.

Rival telecoms operators Vodafone and Orange are also making moves to consolidate their market positions. Orange is currently in awaiting regulator permission regarding its proposed €3.4 billion acquisition of Jazztel, while Vodafone is reported to be looking to acquire several smaller cable operators. These deals are likely to face increased scrutiny amid concerns of dwindling consumer choice as the three telecommunications giants continue to favour multiplay offerings.



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