Market Insight

European Commission blocks O2-3 merger in UK

May 11, 2016

Julian Watson Julian Watson Senior Principal Analyst, IoT

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The European Commission has blocked Hutchison CK’s proposed acquisition of Telefónica UK (O2 UK), which would have reduced the number of UK mobile network operators (MNOs) from four to three.

  • The merger of Hutchison CK’s 3 unit with O2 UK would, in the European Commission’s view, 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 and current and future 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.
     
  • In IHS view, the rejection of the deal will open up M&A opportunities for other operators, such as Virgin Media.

Our analysis

Two different regulators, two different decisions

In January 2016, the UK’s Competition and Markets Authority (CMA) approved BT’s acquisition of EE. Five months later, the European Commission, has rejected the 3-O2 UK deal, having earlier declined the UK’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 UK 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 UK merger would reduce competition in retail and wholesale mobile markets and decided to block it.

A range of UK operators had lobbied against both the BT-EE and 3-O2 UK deals and will be much happier with the most recent decision. In their view, the CMA analysis of the BT-EE deal failed to consider the impact on competition of the latter’s strong spectrum holdings compared with its rivals and its unrivalled scale across fixed voice, fixed broadband mobile and pay TV.

In IHS view, BT’s control of around 67% of UK 1.8GHz 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% of the UK’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 UK. However, in IHS view 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 options, including M&A

Hutchison CK’s official response to the decision gave little away. It said that it will consider the European Commission’s decision in detail and will consider its options, including legal ones. The Hong Kong-based company will 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. Although the European Commission has more recently taken a tougher approach to mobile consolidation (Telenor and TeliaSonera abandoned their plans to merge their Danish mobile operations in 2015 following objections from the European Commission), Hutchison CK may 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 foreign operator or diversification into the fixed segment. As the only independent UK fixed operator with scale, 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).

 

Geography
UK
Research by Market
Mobile & Telecom
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