Brussels warned on Monday that it may re-examine UIP's exemption from European anti-competition laws following the merger of Universal parent Seagram and Vivendi, owner of Canal Plus.

The European Commission - which granted UIP an exemption as recently as September last year - now appears to be concerned about the merged company's links to Paramount through UIP, the international distribution joint venture of Paramount Pictures and Seagram-owned Universal Pictures.

In a statement confirming it had cleared the Vivendi-Seagram merger, the Commission said that the threatened investigation was "in the context" of Vivendi's 11th-hour offer to divest itself of its 20% holding in UK pay-TV broadcaster BSkyB. The BSkyB holding would have linked the merged operation with another US studio, Twentieth Century Fox, through BSkyB parent News Corp.

Along with pulling out of BSkyB, one condition of Brussels' clearance of the Vivendi-Seagram merger was that Canal Plus would not receive "first-window" rights covering more than 50% of Universal product. The five-year commitment covered France, Belgium, Italy, The Netherlands, Spain and the Nordic countries.

The investigation into UIP - which Brussels said it had not yet committed to undertake - would be an unusual move for the Commission, which rarely clears a deal while saying doubts remain about its possible effects. Withdrawing from BSkyB already marks what is thought to be the largest divestiture required by the Commission to obtain clearence.

UIP's Paul Oneile said "there is no doubt in my mind" that any investigation would find in favour of UIP. "UIP has been looked at by the European Commission on a number of occasions in the past and, if it does so another time, I don't see why any decision would be different than the time before and the time before that," he added.

Oneile pointed out that UIP had fulfilled a key condition of last year's exemption by appointing acquisitions chief Marion Pilowsky partly to boost UIP's support of European product. Under her tenure, UIP struck multi-picture deals with independent producers and financiers such as Germany's Advanced and Spain's Planeta.

Canal Plus insiders also downplayed the possibility of an investigation, stressing that the renewal of UIP's authorisation is very recent and involved lengthy negotiations. They also argued that the European distribution operations of Canal Plus' StudioCanal do not overlap with UIP as they do not encompass studio-size US titles.

One suggestion was that Brussels was simply annoyed with Vivendi for presenting the merged operation to analysts a day before the EC made its decision known.

But critics question UIP's commitment to European films, arguing that UIP's deals with independents are often just physical distribution pacts. While UIP's current campaign for Billy Elliot proved the distributor's ability to give a successful wide release to a low-budget European film, many of its output deals with independents involve no p&a commitment.

Oneile pointed out that UIP is only a theatrical distributor and does not have the cushion of TV and video rights. "We are a commercial organisation," he said. "Like everybody, we try to minimise our risk. We are only talking about theatrical distribution, which is at the very high risk end of distribution."

While an EC spokesperson said that the issue was the overall structure of UIP rather than whether Universal should bow out of the operation, sources suggested that being forced to dissolve UIP might be "a blessing in disguise" for the merged company. Currently, if it wanted to route all Universal films through StudioCanal, it would have to buy out Paramount from UIP or run the two alongside each other for the length of its UIP contract.

But Seagram and Vivendi appear to have resisted pressure to leave UIP as a condition for clearing the merger - certainly if such a move meant buying out Paramount. A commission spokesperson reportedly said on Monday that Brussels had pushed Universal to exit UIP but had accepted the withdrawal from BSkyB as a compromise.

Commission spokeswoman Amelia Torres is understood to have told reporters: "Our preferred option was for them to withdraw from UIP. They explained to us they could not do that until the current five-year agreement came to an end, so the commission settled for their exit from BSkyB."

Francoise Meaux Saint Marc IN PARIS contributed to this report