EC Blocks £10.25bn Merger Of O2 And Three

The European Commission (EC) has formally blocked the proposed merger of Three and O2 in the UK amid fears the £10.25 billion deal would harm competition and innovation in the retail and wholesale markets.

The sale of O2 by Telefonica to Three’s parent CK Hutchison has been subject to a lengthy investigation, but none of the remedies offered satisfied the EC’s “serious” concerns about the impact on the mobile sector.

Both the UK Competitions and Markets Authority (CMA) and Ofcom also opposed the transaction.

The EC’s decision is not unexpected given a number of recent failed telecoms mergers and evidence that suggests that prices have increased in countries where network consolidation has occurred.

Blocked merger

“We want the mobile telecoms sector to be competitive, so that consumers can enjoy innovative mobile services at fair prices and high network quality,” said Commissioner Margrethe Vestager, who is in charge of competition policy.

“The goal of EU merger control is to ensure that tie-ups do not weaken competition at the expense of consumers and businesses.

“Allowing Hutchison to takeover O2 at the terms they proposed would have been bad for UK consumers and bad for the UK mobile sector. We had strong concerns that consumers would have had less choice finding a mobile package that suits their needs and paid more than without the deal.

“It would also have hampered innovation and the development of network infrastructure in the UK, which is a serious concern especially for fast moving markets. The remedies offered by Hutchison were not sufficient to prevent this.”

Competition concerns

The proposed merged entity would have had more than 40 percent of the UK market and would have reduced the number of networks from four to three.

Three, the UK’s smallest operator, has traditionally been a disruptive force, attempting to differentiate itself from EE, O2 and Vodafone with offers such as inclusive roaming, unlimited data and no additional fees for 4G. If part of a combined O2, it would have had less incentive to do this.

At a wholesale level, the reduction of networks would result in reduced choice for mobile virtual network operators (MVNOs) such as Virgin Media, potentially increasing costs.

Additionally, a combined O2-Three would have had an involvement in both the MBNL infrastructure sharing joint-venture between EE and Three and Beacon between O2 and Vodafone. The EC said this would have given the new market leader a complete overview of both project’s future plans, inhibiting network development and weakening EE and Vodafone.

Rejected remedies

To alleviate these concerns, Hutchison proposed giving capacity to one or two MVNOs and a significant amount of bandwidth to Virgin Media. It also pledged to sell O2’s share in Tesco Mobile and freeze prices for five years following the completion of the merger.

However the EC said it was unclear how effective these measures would be, how they would be monitored, and did not do anything to address its fears about the wholesale market.

“The Commission therefore concluded that the proposed remedies would not have been able to prevent the likely negative impact on prices, quality of service and network innovation in the UK mobile sector as a result of the takeover, which is why it decided to block the proposed transaction to protect UK customers and businesses,” it explained.

Three’s parent Hutchison has said it is “deeply disappointed” with the ruling and could challenge it.

“We will study the Commission’s Decision in detail and will be considering our options, including the possibility of a legal challenge,” said a spokesperson.

“We strongly believe that the merger would have brought 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 and businesses across the country and dealing with the competition issues arising from the current significant imbalance in spectrum ownership between the UK’s [mobile operators].”

Future

The parties involved had argued the merger was essential, as Three and O2 would struggle to compete in an increasingly converging UK telecoms market against the likes of BT, Sky, Virgin Media and Vodafone. Both now face an uncertain immediate future, according to industry observers.

“The collapse of the deal leaves both Three and O2 in a precarious position with uncertain futures in the UK,” Kester Mann, principal operator analyst at CCS insight. “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 Telefonica may elect to hold on to an asset that in recent years has impressively out-performed rivals despite its uncertain future.

“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.

“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.”

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