On 11 May 2016, the European Commission ("Commission")
prohibited the proposed acquisition of Telefónica's O2
by Hutchison's Three under the EU Merger Regulation. The
Commission's primary concern was that a combined Three/O2 would
have the ability and incentive to raise prices in the UK market for
mobile telecom services.
The Commission was concerned that a 'four to three' deal
would lead to reduced choice and quality for customers, hamper the
future development of UK mobile network infrastructure, and reduce
the number of mobile network operators ("MNOs")
effectively willing to host mobile virtual network operators
("MVNOs"). MVNOs do not own the networks they use
to provide mobile services but instead agree with MNOs to access
their network at wholesale rates. Further concerns arose as
the four UK MNOs have already agreed to share their network
infrastructure – O2 with Vodafone, and Three with EE.
As a result, the merger would enable the combined Three/O2 to
hamper its rivals' plans to improve those shared networks by,
for example, making it more expensive for one rival to expand or
frustrating investments by the other. Lastly, the parties
argued that UK customers would benefit from the deal based on the
integration of the Three and O2 networks. However, the
Commission regarded the claimed efficiencies as uncertain to
materialise and likely to do so, if at all, only a few years after
Three/O2 is the 25th Commission prohibition in 26 years of EU
merger control practice. It is also the first mobile telecom
merger blocked under the EU Merger Regulation and in sharp contrast
to recent cases involving mobile telecom consolidations.
While Commissioner Almunia was in office, the Commission
conditionally approved 'four to three' mobile telecom deals
in Austria (see VBB on Competition Law, Volume 2013, No.1,available at
www.vbb.com), Ireland (see VBB on Competition Law, Volume
2014, No.6,available at
www.vbb.com), and Germany (see VBB on Competition Law,
Volume 2014, No.7,available at
www.vbb.com). However, since Commissioner Vestager came
to office in November 2014, the preference for conditional
clearance of 'four to three' mobile telecom deals has
shifted. For example, the Commission acknowledged it had been
"on the road" to prohibit the
Telenor/TeliaSonera merger in Denmark before it was
abandoned prior to a formal decision in September 2015 (see VBB
on Competition Law, Volume 2015, No.9,available at
Of course, each merger analysis is fact-specific and there is no
"magic number" that either three or four MNOs must be
retained for a competitive telecom market. The message from
the Commission is that competition, not consolidation, has promoted
investment in mobile network infrastructure. Nonetheless,
Three/O2 represents an important policy turning point.
Currently, the Commission is carrying out an in-depth investigation
into another 'four to three' mobile telecom deal: the
Three/WIND joint venture in Italy. A decision is
expected in August 2016 and it will be interesting to see how the
new approach will apply.
The Hutchison/Telefónica case also illustrates
the close working relationship between the UK's Competition and
Markets Authority ("CMA") and the Commission. The
CMA originally sought a referral of the Three/O2 transaction to the
UK, under Article 9(2) of the EU Merger Regulation. Despite
the Commission refusing its request, the CMA later noted that it
enjoyed 'extensive, constructive engagement' during the
investigation. Later, the CMA argued in an open letter that
the parties' proposed remedies were 'materially
deficient' and concluded that absent comprehensive structural
remedies – such as the divestment of the entire Three or O2
mobile network businesses – the only option available was
prohibition. Ultimately, the Commission agreed.
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