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November 11, 2010
Prisa and Telecinco have been cleared by Spanish competition regulator CNC to merge their free TV and pay TV interests. In a deal agreed in December 2009, Prisa agreed to sell 22 per cent stakes in its pay TV platform Digital Plus to Telecinco and telephone company Telefonica. This part of the agreement was approved by the CNC yesterday, which cleared the takeover of Prisa's free-to-air channel Cuatro by Telecinco last month.
At issue were clauses in the merger agreement that would have allowed Telecinco and Telefonica to veto strategic decisions about Digital Plus, including its business plan and annual budget. The two companies would also have been able to appoint senior management. Last week, the three companies informed the CNC that these agreements would be scrapped, and the body was able to give its approval. The CNC says that, with Prisa holding 56 per cent in the shares of Digital Plus via a holding company DTS Distribuidora de Televisión Digital SA, there was 'no modification of the central structure of the company'.
Telecinco will now take full control of Cuatro, with Prisa taking 18.3 per cent of the shares in the company, which operates the flagship channel of the same name and several digital terrestrial channels. The transaction is now expected to be completed by the end of the year. However the CNC approved the deal only subject to a list of conditions which will apply for three years and may be renewed after that. These include:
- An agreement by Telecinco that it will not combine airtime sales of the two strongest free-to-air channels in the newly formed group and not to sell commercial packages of channels with a joint audience of more than 22 per cent.
- Telecinco will not sell advertising airtime for any third party free digital terrestrial (DTT) channels, or sell advertising together with other media owned by Prisa, Telefonica or their subsidiaries.
- The broadcaster will not sign exclusive free-to-air film and TV rights agreements with more than three of the seven Hollywood majors, and to acquire no more than 60 per cent of the overall annual volume of first run output by the studios.
- Telecinco will not show any matches from the first division of La Liga, the Spanish football championship, and will not show more than two of the following: Formula One motor racing, the Moto GP, basketball competitions involving Spanish first division clubs or the national team, and the road cycle races the Vuelta a Espana and Tour de France.
The Telecinco-Cuatro merger has sparked speculation about the emergence of a new super-broadcaster dominating the Spanish free-TV landscape. However, we feel these fears may be overstated, although the merged group will have the opportunity to enhance its ad sales.
The combined group audience share of Telecinco and Cuatro channels was 25.6 per cent in the first nine months of the year, only slightly ahead of public broadcaster TVE (24.4 per cent), but ten percentage points more than its main commercial rival, the Antena 3 TV group. TVE has ceased to be a competitor as of 2010 following a complete advertising ban and strict limitations regarding content acquisition. Telecinco-Cuatro therefore could be in a position to dominate the advertising landscape, for example in determining prices.
However, the CNC's prohibition on bundling advertising sales between the two leading free-to-air channels in effect means that Telecinco airtime and Cuatro airtime will have to be sold separately. This puts severe limitations on leveraging the newly obtained audience leadership for advertising revenue growth. Furthermore, Screen Digest doubts that the new Telecinco-Cuatro group could exceed thie 22 per cent threshold with any combination of one flagship channel and the entire portfolio of present and future DTT channels anyway. Further channel launches may boost the DTT audience share, but audience share at the flagship channels will remain flat at best in a fragmenting channel landscape. Secondly, bundling offers depend on the compatibility of audience profiles between channels. Telecinco's DTT channels target very different demographics to the main channel, which makes it difficult to price the bundled audience. The upcoming inclusion of Cuatro's DTT channels in the portfolio will further increase this compatibility problem.
Nevertheless, despite these limitations, Screen Digest is not entirely bearish regarding advertising growth through the merger. The newly-formed group has the chance to improve its existing bundling offers by selectively bundling DTT audiences with Telecinco or Cuatro, depending on which channel's programming window is a better demographic match for an advertiser. Therefore, some of the deficits of the current bundling model can be resolved.
The conditions set out by the CNC have been eagerly awaited by market observers because they are seen to be a blueprint for a potential Antena3-LaSexta merger, which is still in the air. From an advertising perspective, the conditions set out by the CNC not only define how an Antena3-LaSexta alliance may look, but they are also likely to ease the pressure on Antena 3 and LaSexta to close a merger deal quickly. In terms of advertising, neither of these broadcasters faces a threat to their independent survival from the Telecinco-Cuatro merger.
Telecinco does not seem likely to be unduly troubled by the limits imposed on rights acquisition. At present it has some agreements with US studios but is well short of the 60 per cent ceiling, and has none of the list of sports events - though it will have rights to the Moto GP from 2012. The CNC agreement therefore gives the company - plenty of headroom to increase its portfolio of programme rights.
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