By Joe Hoppe, Sabela Ojea

The U.K. markets regulator said Thursday that it has provisionally found that Facebook Inc.'s merger with Giphy will harm competition between social media platforms and remove a potential challenger in display advertising markets.

The Competition and Markets Authority said that if its concerns are ultimately confirmed, it could demand that Facebook unwind a $400 million deal made in May 2020 and sell off Giphy in its entirety.

Giphy allows users to search, create and share GIFs, short looping videos.

The CMA said that given millions of posts on social media include GIFs on a daily basis, any reduction in options or quality of images could change the way people use the sites and prompt a switch to another social-media platform.

Platforms would have little choice if Facebook were to deny them access to the images, or change usage terms, such as requiring more user data, the CMA said, noting that most major competitors, such as Twitter, TikTok and Snapchat use Giphy GIFs, use Giphy GIFs.

Google's Tenor GIF's platform is the only other large provider of GIFs, the U.K. watchdog said. It said other competition authorities are also investigating the merger. Facebook's platforms already account for more than 70% of the time users spend on social media, the CMA's analysis also found.

The CMA began probing the deal in June 2020, and launched an initial investigation in January.

Before the merger, Giphy's own paid advertising in the U.S. had the potential to compete with Facebook's advertising services, and had been considering expanding the service to other countries including the U.K., potentially challenging Facebook, the watchdog said.

In July 2020, the CMA found that Facebook controlled more than 50% of the U.K.'s 5.5 billion-pound ($7.63 billion) display advertising market.

Responses from interested parties to the provisional findings are open until Sept. 2, and the CMA said it will issue a final report by Oct. 6.

Write to Joe Hoppe at joseph.hoppe@wsj.com and Sabela Ojea at sabela.ojea@wsj.com

(END) Dow Jones Newswires

08-12-21 0642ET