The European Commission has blocked the proposed acquisition by Hutchison 3G of Telefonica UK under the EU Merger Regulation. In a press release published on 11 May, the Commission confirmed that it had strong concerns that this planned merger of the Three and O2 businesses in the UK, if cleared, would leave UK mobile customers with less choice and lead to higher prices. The Commission also stated that the deal would harm innovation in the mobile sector if allowed to go ahead. The decision casts out on the acceptability of future four-to-three mergers in the mobile sector.
The Commission's decision
On 11 May 2015, the Commission announced its decision to block Hutchison 3G's planned takeover of Telefonica UK, the planned merger of Three and O2 in the UK. The planned transaction, valued at GBP 10.25 billion, would have led to a four-to-three merger in the UK mobile market. It had been subject to a phase 2 merger control investigation by the Commission since October 2015.
The Commission's stated reason for blocking the merger was that it would have reduced competition in the market and hampered the development of the UK mobile network infrastructure as well as the ability of mobile virtual operators to compete. The exact reasons provided by the Commission are discussed below:
- Less competition leads to higher prices and reduced choice and quality for consumers: The takeover would have eliminated competition between two strong players in the UK mobile market. Three is the latest market entrant and has been an important driver of competition in the UK mobile market. O2 has a strong position with high brand value and reputation. Combined, Three UK and O2 UK would have been the market leader with a share of more than 40%. According to the Commission, these operators would have had much less incentive to compete with Vodafone and Everything Everywhere (EE). This would have reduced choice and quality of service for UK consumers. The Commission's analysis also showed that, with the takeover, retail mobile prices would have been higher for all UK operators than without.
- Future development of entire UK mobile network infrastructure hampered: The merged entity would have been part of both network sharing arrangements, MBNL and Beacon. It would therefore have had a full overview of the network plans of both remaining competitors, Vodafone and EE. The Commission believes that its role in both networks would have weakened EE and Vodafone and hampered the future development of mobile infrastructure in the UK, for example with respect to the roll-out of next generation technology (5G), to the detriment of UK consumers and businesses.
- Reduced number of mobile network operators effectively willing to host mobile virtual network operators ("MVNOs"): The transaction would have reduced the number of mobile network operators willing to host MVNOs on their networks. The Commission believes that the reduced number of host mobile networks would have left prospective and existing mobile virtual operators in a weaker negotiating position to obtain favourable wholesale access terms.
Remedies proposed by Hutchison 3G
Hutchison 3G offered a number of remedies aimed at addressing the Commission's competition concerns during the Phase 2 investigation. These remedies are summarised below.
- As regards the Commission's first concern (the loss of competition between Three and O2), Hutchison 3G proposed a set of measures aimed at strengthening the development of existing MVNOs or supporting the market entry of new ones, including:
- granting access to a share of the merged entity's network capacity;
- divesting O2’s stake in the Tesco Mobile joint venture, and offering a wholesale agreement for a share of its network capacity to Tesco Mobile; and
- offering a wholesale agreement for a share of its network capacity to Virgin Media.
- In relation to the Commission's second and third concerns (the UK network sharing agreements and the takeover's effect on MVNO access), Hutchison 3G offered a set of behavioural measures, including measures aimed at granting MVNO access to 4G and future technologies.
The Commission did not consider that the proposed remedies would resolve the structural problem created by the disruption to the current network sharing agreements in the UK. They were also not considered capable of replacing the weakened competition in the retail and wholesale mobile telecoms markets brought on by the takeover. The Commission was also concerned that the behavioural measures proposed raised significant uncertainty as regards their effective implementation and monitoring. Indeed the Commission is typically reluctant to accept behavioural remedies in merger control cases.
Significance of the Commission's decision
The Commission cleared three four-to-three mobile mergers in the EU between December 2012 and July 2014 in Austria, Ireland and Germany. Each of these takeovers was subject to the implementation of very interventionist clearance conditions, including capacity sharing and spectrum access requirements. The parties to the mergers argued that consolidation was an essential precursor to investment.
The Commission appears to have doubted whether the merger clearance remedies imposed on the merged entities in these transactions have proved to be adequate. The Commission's decision confirms that it does not believe that even very interventionist remedies are necessarily capable of mitigating or addressing the risk to competition caused by a merger in highly concentrated national mobile markets. It is worth noting that in November 2015, the Commission issued a report on two earlier mobile telecommunications mergers which showed that one of them (T-Mobile/Orange in The Netherlands) may have resulted in increased prices relative to other countries. Also, a plan to merge the Danish activities of Telenor and TeliaSonera unravelled late last year, apparently because the parties regarded as unworkable the merger remedies that the Commission was considering. A further merger between Hutchison 3G Italia and VimpelCom's Wind is currently subject to a Phase 2 investigation by the Commission, with a final decision expected shortly.
The Hutchison 3G/O2 UK case is also interesting because the UK Competition and Markets Authority (the "CMA") took the unusual step of openly expressing its competition concerns about the planned merger (including concerns about the proposed remedies) in a public letter to the Commission in April 2016. The CMA argued that the planned merger would lead to long term damage to the UK mobile telecoms market, and to UK consumers. This followed a rejection by the Commission of a request by the CMA to refer the planned acquisition to it for review. The Commission stated that it was better qualified to assess such mergers, by applying the EU merger control rules.
The acceptability of future four-to-three mergers in the mobile sector is now open to doubt. It appears that, for the moment at least, the Commission is likely to believe that the anti-competitive effects of such mergers may outweigh claimed efficiencies that would result from merger-related investments. All eyes will now certainly be focused on Brussels to see what the Commission will decide in respect of the Hutchison 3G Italia/Wind merger.