The European Commission has blocked Hutchison CK’s proposed acquisition of Telefónica UK (O2 UK), which would have reduced the number of mobile network operators (MNOs) in the United Kingdom from four to three.
As Julian Watson, director, operators, IHS Technology says, the merger of Hutchison CK’s 3 unit with O2 UK would, in the European Commission’s view, would reduce competition in the retail and wholesale mobile markets, lead to higher prices and disadvantage the country’s other two MNOs, EE and Vodafone UK, as well as current and future mobile virtual network operators (MVNOs)
The European Commission rejected a range of remedies proposed by Hutchison CK to address its competition concerns, such as granting dedicated capacity to MVNOs, as inadequate; in a press release Hutchison CK has said that it is “deeply disappointed” by the decision and cited the possibility of a legal challenge
IHS expects that the rejection of the deal will open up merger and acquisition (M&A) opportunities for other Virgin Media and other operators.
Two different regulators, two different decisions
In January 2016, the Competition and Markets Authority (CMA) in the U.K. approved BT’s acquisition of EE. Five months later, the European Commission, has rejected the 3-O2 UK deal, having earlier declined the U.K.’s request to consider it.
The CMA approved the BT-EE deal largely on the grounds that it would not result in “a substantial lessening of competition” in any U.K. retail or wholesale telecoms market and in particular would not reduce the number of MNOs. By contrast, the European Commission stated that a 3-O2 U.K. merger would reduce competition in retail and wholesale mobile markets and decided to block it.
A range of U.K. operators had lobbied against both the BT-EE and 3-O2 UK deals, and they will be much happier with the most recent decision. In their view, the CMA analysis of the BT-EE deal failed to consider the competitive effects of the latter’s strong spectrum holdings, compared to its rivals, and its unrivalled scale across fixed voice, fixed broadband mobile and pay TV.
IHS expects BT’s control of around 67 percent of U.K. 1.8 gigahertz (GHz) and 2.6GHz holdings will indeed give it a competitive advantage in the 4G space. EE is using these rich holdings to deploy LTE coverage to 95 percent of the U.K.’s landmass by 2020, which goes way beyond its rivals’ 4G plans.
The no-go opens up opportunities for Liberty Global’s Virgin Media
The rejection of the merger may open up opportunities for Liberty Global, which is moving away from the MVNO model and acquiring MNOs in Europe. Recently it has acquired the MNO Base in Belgium from KPN and has merged its Dutch cable assets with Vodafone’s Netherlands mobile operations.
Liberty Global has in the past explored a potential tie-up with Vodafone in the U.K. However, a deal to acquire O2 UK would have greater benefits: it would be far easier to broker, would gain regulatory approval and give it an immediate advantage in the mobile market over its main pay-TV rival Sky, which is launching MVNO-based mobile services later this year.
Hutchison CK will consider various legal and M&A options
Hutchison CK’s official response to the decision gave little away. The company stated that it will consider the European Commission’s decision in detail and will consider its options, including legal ones. The Hong Kong-based company is almost certain to note that in the past the European Commission has approved in-country consolidation elsewhere in Europe.
In 2014, Telefónica Deutschland’s acquisition of E-Plus in 2014 reduced the number of MNOs from four to three. Similar deals in the past few years in Austria (3-Orange) and Ireland (3-O2) also reduced the number of MNOs from four to three. The European Commission has more recently taken a tougher approach to mobile consolidation.
For example, Telenor and TeliaSonera abandoned their plans to merge their Danish mobile operations in 2015 following objections from the European Commission. Hutchison CK may now view previous approvals of deals in Austria, Germany and Ireland as setting a precedent.
Hutchison CK will also consider potential M&A options, including a sale to a third party, such as a private equity firm of a foreign operator or diversification into the fixed segment. As the only independent fixed operator with scale in the U.K., TalkTalk is a potential target, although the extent to which it has recovered customer losses following last year’s cyber attack will shape its attractiveness to potential buyers. TalkTalk reports its next financials tomorrow (12 May 2016).
The author of this blog is Julian Watson, director, operators at IHS Technology.
Comment on this article below or via Twitter: @ VanillaPlus OR @jcvplus
