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EC Blocks O2/ Three Merger

M&A Merger

The European Commission has blocked the sale of O2 to the owner of the Three netowrk, CK Hutchison. The proposed merger, worth £10.3bn, would have reduced the number of mobile network operators to three in the UK which raised questions about competition in the market. CK Hutchison said they are considering a legal challenge to the decision.

The European competition commissioner, Margrethe Vestager, said she had 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,” said Ms Vestager.

“We want the mobile telecoms sector to be competitive, so that consumers can enjoy innovative mobile services at fair prices and high network quality.”

The concessions offered by Hutchison included a five-year price freeze and billions of pounds of investment. However, these concessions were deemed “not sufficient” to prevent the hampering of innovation and network infrastructure development.

Kester Mann, Principal Analyst, Operators at CCS Insight, commented, “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 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.

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.

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 to foresee the alleged negative impact in these markets that have already consolidated.”

Eli Katz, the Chair of ITSPA, stated “ITSPA is pleased that the European Commission has blocked the O2/Three deal. We believe that, if the deal had gone ahead, it would have resulted in price rises, negatively impacting the consumers in the UK. ITSPA feels that a competitive landscape in the UK telecommunications market is vital to provide the best outcomes for consumers and businesses. A reduction from four to three mobile network operators would have threatened this.”

Katz went on “We’re also pleased that one of ITSPA’s key concerns with the proposed merger was highlighted by the Commission as one of its top three reasons to block the deal. The Commission was right to state that merger would have resulted in fewer MNOs willing to host virtual operators, consequently the damage to the MVNO market would have hindered innovation and competition, resulting in negative outcomes for UK consumers. We are delighted that our concerns were taken into account and we hope that the UK mobile market can now become as competitive and innovative as it currently is for fixed telephony.”