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European Commission blocks Three/O2 UK mobile merger

Nick Pimlott
11/05/2016
Hutchison's attempted takeover of Telefonica's O2 mobile network in the UK was blocked today (11 May 2016) by the European Commission. Although widely predicted, this decision is the first outright prohibition by the Commission of a 4-to-3 mobile merger in Europe.

Hutchison's attempted takeover of Telefonica's O2 mobile network in the UK was blocked today (11 May 2016) by the European Commission. Although widely predicted, this decision is the first outright prohibition by the Commission of a 4-to-3 mobile merger in Europe. One previous such deal that the Commission considered – Telenor and TeliaSonera in Denmark in 2014 – was abandoned by the parties in the light of the Commission's competition concerns. Others in Austria, Ireland and Germany have been cleared. The Hutchison/O2 decision is also the first formal blocking decision of EU Competition Commissioner, Margrethe Vestager, and the first outright prohibition since her predecessor Joaquin Almunia blocked Ryanair's takeover of Aer Lingus in 2013.

The decision follows 8 months of in depth scrutiny and detailed multi-lateral discussions, which was preceded by around 6 months of pre-notification discussions with the Commission.

In the Commission's view, the deal would have would have removed an important competitor, leaving only two mobile network operators, Vodafone and EE, to challenge the merged entity, which would become the market leader. The Commission's investigation showed that this would have led to significantly reduced competition in the market and be likely to have resulted in higher prices for mobile services in the UK and less choice for consumers.  The takeover would also likely have had a negative impact on quality of service for UK consumers by hampering the development of mobile network infrastructure in the UK. Finally, the takeover would have reduced the number of mobile network operators willing to host other mobile operators on their networks.

As is common in these cases, Hutchison offered commitments to try to allay the Commission's concerns. These sought to improve the position of mobile virtual network operators (MVNOs) already present in the UK and promote entry by new MVNOs.  However, in a market where there were already a number of well-developed MVNOs, such as Tesco Mobile, Virgin Media and Talk Talk, the Commission was not persuaded that these commitments would offset the loss of competition that would result from the merger.

An added twist in this case was the existence of network sharing agreements between Three and EE on the one hand and Vodafone and O2. Had the deal gone ahead the combined Three/O2 entity would have been party to both those network sharing agreements, leading to serious concerns about competition at the network level and a high risk of anti-competitive information sharing.  To put it bluntly, there was a risk that at the network level, the deal was not a 4-to-3 merger but 4-to-1!

The Commission's decision will be welcomed by the UK authorities. Both the telecoms regulator, Ofcom, and the Competition and Markets Authority (CMA) had long opposed the takeover. 

In November 2014, two months before any news of the proposed transaction had reached the press, Ofcom's competition policy director made a speech at a conference in Brussels emphasising that the UK needed (and is capable of sustaining) four mobile network operators competing with each other, in order to maintain a healthy retail telecoms market for consumers, a position reaffirmed by Ofcom's CEO in October 2015.

The CMA sought unsuccessfully to have the case transferred back to it whilst it was considering the BT/EE merger in 2015, but in a letter to the Commission in April 2015, the CMA praised the level of cooperation fostered by the Commission between themselves, the CMA and Ofcom, clearly showing that the UK authorities were actively engaged in the Commission's process.

What next?

Merger cases are highly fact-specific and the Commission has already been at pains to point out that the blocking of Hutchison/O2 does not set a precedent for future cases, a nod no doubt to the fact that the Commission is also in the process of reviewing the proposed merger between Hutchison's 3 Italia and Vimpelcom's Wind in Italy.   But future mobile mergers are certain to face intense scrutiny. 

More widely, the case is interesting for the degree of public opposition expressed by the national competition and regulatory authorities and the evidently close cooperation between them and the Commission. In a case involving exclusively national markets, where the "one-stop-shop" principle of the EU Merger Regulation is arguably of less importance, it is clearly desirable that the Commission should work closely with and pay heed to the views of national authorities. 

As for Hutchison, it has already floated the idea of an appeal to the EU's General Court against the Commission's rejection of the merger. This would be on the limited basis that the Commission lacked authority, infringed procedures, or misused its powers, which are all high hurdles to overcome.

In the UK, Ofcom is now free to begin an auction process in relation to a chunk of radio spectrum suitable for the 4G (and beyond) mobile services. Initially scheduled for February or March 2016, the auction was postponed in December 2015 following the threat of legal action by Hutchison and O2 if the auction went ahead as planned precisely because of the uncertainty surrounding their proposed merger.  At the time of the suspension, Ofcom envisaged a swift resumption of the auction process if the merger was blocked.  It looks like the UK mobile telecoms market will be returning to business as usual in the near future.

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