FTC weighs on fair competition

Telecom regulator may side with FTC for SKT-CJ deal

By Kim Yoo-chul, Yoon Sung-won

The decision by the Fair Trade Commission (FTC) to block SK Telecom’s proposed merger with CJ HelloVision (CJH) is seen as a move by the anti-trust regulator to encourage fair market competition between players.

“KT and LG Uplus jointly expressed serious concerns about bundling and pricing power post-merger. The FTC agreed with such concerns. A full commission hearing will be held on July 20,” a government official said by telephone.

“SK Telecom will submit its opinion about the FTC decision. But its appeal won’t greatly alter the process.”

SK Telecom has been pushing that its acquisition of CJH will help the country’s top mobile carrier expand its media platform business as CJH is Korea’s top pay-TV operator.

KT has teamed up with LG Uplus to press the FTC to block the deal as the merger will restrain competition in the relevant market by creating a single dominant entity with the potential to restrict the choice of substitute services and products available to consumers.

The impact of the possible merger would have been a primary concern as SK Telecom is the country’s top player in mobile communications with a market share of 50 percent.

“The government agency has sought active cooperation with foreign competition regulators with respect to the recently announced major transactions,” said the official. He added that the regulator’s review considered the impact the deal would make on the competitiveness of the industry and local rivals.

Following the FTC move, the Ministry of Science, ICT and Future Planning (MSIP) will team up with the Korea Communications Commission (KCC), the nation’s two telecom regulators, to review the merger plan.

“MSIP will soon begin reviewing the merger plan submitted by SK Telecom and issue the government agency’s decision a few months later,” Song Jae-seong, director at MSIP’s telecommunications policy bureau, said. MSIP is expected to make public its decision by August.

The MSIP plans to operate an advisory committee with 10 experts to review the SKT-CJH merge plan. MSIP said the agency will respect the opinions submitted by the body before making the agency’s final decision.

The two telecom regulators are expected to side with the FTC or grant a “conditional approval” with tough structural measures as a remedy.

Mixed market reaction

Market reactions were mixed. Korea Investment maintained its “buy” rating and target price of 282,000 won for SK Telecom as the FTC’s decision will cut off deepening worries over a prolonged period of uncertainty.

“We believe the FTC’s decision is positive for SK Telecom’s stock price in terms of lessened uncertainty,” said Yang Jong-in of the research firm.

SK Telecom stock fell by 1.14 percent to end at 216,500 won on the Seoul bourse, Tuesday. The stock price of CJH plummeted by 13.33 percent to close at 10,400 won on concerns that the FTC’s decision will hurt the firm’s sustainability.

“Due to the FTC decision, CJH will report its earnings below market consensus throughout this year,” said a senior fund manager at a leading foreign investment bank in Seoul by telephone, wishing to be unidentified.

CJH reported 278 billion won in sales with 25.1 billion won in operating profits during the first quarter of this year, down by 4.9 percent and 6.6 percent, year-on-year.

Moody’s Investors Service expects SK Telecom’s earnings, excluding CJH, to remain largely flat throughout 2016 compared with the level in 2015, given intense competition and limited growth prospects in average revenue per user (ARPU) and the subscriber base.

SK Telecom has no option but to revise its business strategies, while the carrier may face more civil lawsuits by individual investors.

SK Telecom earlier said it was planning to release a “hybrid business model” after its acquisition of CJH.

SK Telecom’s chief executive Jang Dong-hyun identified the media platform, the Internet of Things, and lifestyle as the carrier’s new sales engines as a strategy to cut its heavy reliance on voice and wireless Internet services for mobile phones.

Investments in these new businesses may limit significant improvement in the company’s leverage, said Moody’s.

As a back-up move, SK Telecom planned to partner with CJ Group to establish a 100 billion won fund to help local IT startups and to create ecosystem focusing on content.

“It remains to be seen whether or not SK Telecom will drop its planned merger plan voluntarily; however, there’s no reason for SK Telecom to proceed with the process given all the hurdles and regulatory measures it must face,” said an executive at one SK Group’s affiliate.