Karolina Sereja

UPC may acquire Aster, but not without conditions

Poland’s competition authority has approved cable company UPC’s acquisition of rival Aster, but UPC will have to sell off part of Aster’s network in the next 18 months.

Decision of the President of the Office of Competition and Consumer Protection dated 5 September 2011 (No. DKK-101/11)

Conditional approvals for concentrations are issued fairly rarely. The UPC/Aster decision is the second conditional decision issued by the Polish competition authority in 2011. In the UPC/Aster case, the competition authority set tough conditions that the companies must meet before the transaction can be effective. The main requirement is that UPC has 18 months to find an investor to buy about 30% of the cable network that currently belongs to Aster.

The planned concentration is to consist of UPC’s acquiring control over Aster by acquiring 100% of its shares. The reasons given for the concentration are a desire on the part of Aster’s owners to sell all of the network and on the part of UPC to continue its growth and obtain more customers.

The decision was issued after a nearly 9-month administrative proceeding in which extensive market research was conducted, along with consultation with the President of the Office of Electronic Communications, the Polish telecom regulator. The proceeding well exceeded the standard two months, and was extended by 14 days to consider conditions proposed by the parties (Art. 19(2) of the Act on Competition and Consumer Protection). The proceeding included not only negotiations with the regulator concerning conditional approval for the deal, but also a thorough analysis of the state of competition on the market.

Determining whether approval to the concentration would limit competition on the market required a survey of operators of digital platforms (potential competitors) as well as residential cooperatives in Cracow and Warsaw where the two competitors’ networks are both in operation. Based on this information, the regulator concluded that the relevant market in geographical terms is territories where pay TV services provided by both companies overlap. These areas include Cracow and Warsaw, where the combined market share of the two companies is 50–60%. With market share at this level, there is a danger of creation and abuse of a dominant position in buildings where the Aster and UPC networks are both present.

The President of the Office of Electronic Communications also weighed in on the effects of the planned concentration. She not only stressed the negative aspects of conditional approval (creation of a dominant position, increased concentration, a threat of creation of an oligopoly, possibly higher prices and worse services, and a decline in the number of independent players competing on the market), but also pointed to the positive aspects—particularly strengthening the largest competitors to serve as a counterweight to the strong market position held by Telekomunikacja Polska. In her view, another desirable effect of the concentration would be the ability to exploit the consolidated economic potential to increase coverage area and modernise the network. Interestingly, the telecom regulator took the view, unlike the competition regulator, that in order to maintain competition on the market it would be sufficient to impose behavioural conditions, namely a requirement to provide wholesale access to the expanded UPC network.

The largest battle played out in the area of the conditions that would be imposed. Competition authorities generally prefer structural conditions that require the parties to make certain permanent changes in the operations of the future entity prior to carrying out the transaction. These may involve sale of some assets, relinquishing control over an enterprise, or awarding exclusive licences to competitors (examples of structural conditions are set forth in Art. 19(2) of the Act on Competition and Consumer Protection). Behavioural conditions, on the other hand, depending on the specific factual circumstances, are addressed to the future and are imposed on the participants for a specific timeframe. UPC proposed such conditions, arguing that structural conditions would present serious technical and operational problems.

The President of the Office of Competition and Consumer Protection finally rejected the views of the telecom regulator as well as UPC, and found that the correct solution would be to impose much more restrictive conditions, specifically structural conditions. Among other measures, she ordered permanent divestment of part of the network belonging to Aster in buildings served by both companies. Divestment is to be made within 18 months after issuance of the decision, to an investor who is independent of the participants in the concentration. She also required UPC to assure uninterrupted access to services without any reduction in quality throughout the period of finalising the transaction. Meanwhile, current Aster customers in buildings also served by UPC will be able to select a new supplier notwithstanding the conditions provided in their contracts. The acquirer is required to keep the regulator notified of performance of the conditions. If the concentration were carried out without fulfilling the conditions, it would have far-reaching consequences and would entitle the regulator to issue restrictive orders, such as requiring a demerger, or divestment of assets or shares (the list of measures the regulator could impose is set forth in Art. 21(2) of the Act on Competition and Consumer Protection).

Ultimately, on 2 September 2011 UPC accepted the conditions imposed. The regulator’s decision is not legally final, however, and there is a right to appeal to the Court of Competition and Consumer Protection.

In evaluating this decision, it should be pointed out that the apparent priority was to maintain competition from the point of view of consumers who previously had a choice of service providers. The issue of consolidation and the ability to compete with the strength of Telekomunikacja Polska on this market, as well as the pressure to modernise and expand the network, which were urged by the telecom regulator, proved to be of secondary importance. The final result will be known within 18 months, the period UPC has to sell about 30% of the Aster assets to an independent third party.

Karolina Sereja, Competition Law practice, Wardyński & Partners