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EU blocks O2/Three merger

May 11, 2016

By Colin Mann

Competition watchdogs at the European Commission have blocked the sale of Telefónica’s O2 UK mobile operator to CK Hutchison, the owner of mobile company Three.

The planned deal was worth £10.3 billion, and would have left the UK with just three major mobile phone network operators.

Competition Commissioner Margrethe Vestager expressed strong concerns about the takeover, ruling that it would reduce customer choice and raise prices.

“The goal of EU merger control is to ensure that tie-ups do not weaken competition at the expense of consumers and businesses,” she stated. “We want the mobile telecoms sector to be competitive, so that consumers can enjoy innovative mobile services at fair prices and high network quality.”

Although Hutchison had offered concessions, including a five year price freeze and billions of pounds in investments, they were deemed “not sufficient” to prevent the hampering of innovation and network infrastructure development.

In response, CK Hutchison contended that the acquisition would bring “major benefits” to the UK not only by unlocking £10 billion of private sector investment in the UK’s digital infrastructure but also by addressing the country’s coverage issues, enhancing network capacity, speeds and price competition for consumers.

According to Kester Mann, Principal Analyst, Operators at CCS Insight, the collapse of the deal leaves both Three and O2 in a precarious position with uncertain futures in the UK. It also casts serious doubt over the future structure of a European telecoms sector that had banked on the tie-up paving the way to further consolidation.

“The most likely eventual outcome for O2 is sale to private equity, however Liberty Global, which owns Virgin Media, could consider a bid. Sale or partial-sale to a deep-pocketed operator from outside the UK such as Softbank or America Movil is also plausible. For the time being however, O2’s parent Telefónica may elect to hold on to an asset that in recent years has impressively out-performed rivals despite its uncertain future,” he suggested.

“Three’s future now looks vulnerable as a sub-scale mobile operator in a market rapidly transitioning to multiplay. A possible option could be to acquire TalkTalk. The broadband and TV provider deploys a similar low-cost strategy and could be available in a cut-price deal having been badly damaged by a recent security breach. Such a deal would not attract major competition concerns and would offer greater scale as well as a position in the rapidly-growing UK multiplay market,” he noted.

“Although the Hong Kong company offered a range of concessions, its apparent preference to assist virtual providers or those with a heritage in fixed-line broadband or TV including Virgin Media, rather than facilitate a more mobile-focussed rival, may have been the undoing of the deal” he surmised.

“After similar deals were waved through in Austria, Ireland and Germany, the European Commission has either been hugely inconsistent in its merger and acquisition policy or failed foresee the alleged negative impact in these markets that have already consolidated,” he concluded.

“Fewer competitors can mean less pressure to keep prices down and this threat was obviously too great in the regulator’s minds, despite assurances from Hutchison on price freezes and significant infrastructure investment,” suggested Imran Choudhary, consumer insight director at Kantar Worldpanel.

“As soon as BT’s purchase of EE completed earlier this year, the UK’s mobile operators were looking to safeguard their assets and best position themselves to compete.  Hutchison has adopted a wider global strategy of expansion through acquisition and was looking to extend that approach to the UK, while Telefonica’s willingness to sell O2 reflects its new focus on emerging markets.”

“O2 will ideally still look for a buyer and Virgin Media – which is owned by Liberty Global – could certainly step in and solidify its presence as a true quad-play provider, allowing the operator to go head-to-head with BT and EE.  Hutchison will now turn its gaze to a merger it has planned in Italy to ensure that isn’t also rejected, while in the UK, Three will have to find new ways to disrupt the mobile market.”

“In the longer term the question of how sustainable a four-operator market structure is for the UK will be tested.  As it becomes increasingly difficult for networks to generate revenue, the significant expenditure needed to facilitate growing data consumption is going to be more of a burden on both Three and O2.  Customers are the ones who will suffer if the UK lags behind – the very opposite of what the regulators wanted.”

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