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European Commission blocks Three’s takeover of O2

The European Commission has blocked the proposed takeover of UK mobile network O2 by competitor Three

Alex Scroxton
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Published: 11 May 2016 12:00

The European Commission (EC) has formally blocked the £10.25bn acquisition of UK mobile network operator (MNO) O2 by its smaller rival Three.

The takeover, which was first proposed in 2015, would have seen the number of mobile networks in the UK reduce from four down to three.

The EC concurred with the UK’s telecoms regulator Ofcom and the Competition and Markets Authority (CMA) in its judgment. Both bodies had been vocal in their rejection of the deal.

EC commissioner Margrethe Vestager said fears over competition had ultimately proved the undoing of the deal.

“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 goal of EU merger control is to ensure that tie-ups do not weaken competition at the expense of consumers and businesses,” she said.

“Allowing [Three’s parent] CK Hutchison to takeover O2 at the terms they proposed would have been bad for UK consumers and bad for the UK mobile sector. We had strong concerns that consumers would have less choice finding a mobile package that suits their needs and paid more than without the deal.

“It would also have hampered innovation and the development of network infrastructure in the UK, which is a serious concern especially for fast moving markets. The remedies offered by Hutchison were not sufficient to prevent this,” said Vestager.

Concessions rejected

Hutchison had made a number of concessions in an attempt to win favour for its merger, including price freezes for customers, network investment and the sale of fractional shared ownership interests in its network capacity to competitors.

A spokesperson for CK Hutchison said: “We are deeply disappointed by the commission’s decision to prohibit the merger between Three UK and O2 UK. We will study the commission’s decision in detail and will be considering our options, including the possibility of a legal challenge.”

The spokesperson said CK Hutchison strongly believed the merger would have brought major benefits to the UK by unlocking billions of pounds worth of private sector investment in the UK’s digital infrastructure, addressing mobile network coverage issues, improving network capacity, network speed and price competition for all.

It would also have dealt with the competition issues arising from a “significant imbalance” in spectrum ownership among the UK’s operators, the spokesperson claimed.

“CK Hutchison will now focus on working with the commission towards clearance of our proposed merger with Wind and Three Italia and continue to pursue strategies to bring value to CK Hutchison Group,” said the spokesperson.

Vestager said that its decision over the UK merger did not set a precedent for CK Hutchison’s Italian job.

What future for UK mobile?

CCS Insight’s Kester Mann said the collapse of the deal left both operators with uncertain futures in the UK, and cast doubt over the future structure of the wider European telecoms sector that, he said, had banked on the tie-up opening the doors to more consolidation.

“The most likely eventual outcome for O2 is sale to private equity. However, Liberty Global – which owns Virgin Media – could consider a bid,” said Mann.

“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.

“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.”

Mann criticised the EC, saying Brussels had either been hugely inconsistent in its mergers and acquisitions policy – having allowed similar deals to go through in Austria, Germany and Ireland – or had utterly failed to foresee the “alleged negative impacts” in those markets.

Ovum’s Matt Howett also criticised Brussels, saying it had gone too far in advocating the creation of a fourth MNO in the UK as a condition of the deal. This would have meant divestment of a significant chunk of the merged business.

“As well as there being no obvious taker for such a remedy, in many ways it would also have undermined the whole economic rationale of the merger. It would have only set to reinforce the spectrum inferiority and capacity constraints of both operators,” said Howett.

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