European Commission blocks Three's proposed £10.25bn acquisition of O2 UK

Publicly, at least, it all began with a rumour in January 2015. A few days later, though, it became official: Hutchison Whampoa, parent company of mobile operator Three, was in talks to acquire O2 UK from Spanish telecoms giant Telefónica.

In March of last year, the two companies announced that they had agreed terms for the £10.25 billion deal, and that it would proceed, subject to regulatory approval. However, in recent months, UK authorities have voiced serious concerns about the takeover. Telecommunications regulator Ofcom recommended that the deal be blocked in February, and last month, the Competition and Markets Authority said it was also opposed to it.

Today, the deal received a killer blow, as the European Commission (EC) announced that it has blocked the proposed acquisition, due to serious and insurmountable concerns that the two companies - and Hutchison in particular - had "failed to adequately address".

The concerns raised by the EC's investigation were related to the anticipated impact on the UK's mobile market. Merging two of the country's largest network operators would have created a 'super-carrier' with far more customers than any of its rivals; according to Ofcom, the combined network would have managed around 40% of all UK mobile connections.

The deal would have left just two major competitors in the UK market - EE and Vodafone - and according to the EC, that would not have worked out well for anyone, except Hutchison:

The significantly reduced competition in the market would likely have resulted in higher prices for mobile services in the UK and less choice for consumers than without the deal. 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.

The EC found that Hutchison's proposed remedies - which included the offer of a five-year price-freeze for all Three and O2 UK customers - were insufficient:

In short, the proposed remedies did not resolve the structural problems created by the disruption to the current network sharing agreements in the UK. They were also not capable of replacing the weakened competition in the retail and wholesale mobile telecoms markets as a result of the takeover. Furthermore, the largely behavioural measures raised significant uncertainty as regards their effective implementation and monitoring, also because they were difficult to define precisely and some depended on the agreement of others:

  • As regards the Commission's first concern (regarding the loss of competition between Three and O2), Hutchison proposed a set of measures aimed at strengthening the development of existing mobile virtual operators or supporting the market entry of new ones, including:
    • Hutchison proposed to give access to a share of the merged entity's network capacity to one or two mobile virtual operators.
    • Hutchison proposed to divest O2’s stake in the Tesco Mobile joint venture, and to offer a wholesale agreement for a share of its network capacity to Tesco Mobile.
    • Hutchison proposed to offer a wholesale agreement for a share of its network capacity to Virgin Media.

Even if those offers were taken up, the mobile virtual operators would have been commercially and technically dependent on the merged entity, with limited ability or incentive to differentiate their offerings, including in terms of network quality.

  • As regards the Commission's second concern (regarding the UK network sharing agreements), Hutchison offered certain behavioural remedies, which would have been difficult to implement and monitor effectively. Three and O2 would have kept their respective stakes in the two network sharing agreements, MBNL and Beacon.
  • As regards the Commission's third concern (regarding the takeover's effect on mobile virtual operators), Hutchison offered a set of behavioural measures aimed at granting mobile virtual operators access to 4G and future technologies. These were commercially unattractive for the mobile virtual operators and raised significant uncertainty as regards effective implementation.

Commissioner Margrethe Vestager said that "allowing Hutchison to takeover O2 at the terms they proposed would have been bad for UK consumers and bad for the UK mobile sector."

Research published by Ofcom earlier this year warned that UK mobile phone contracts could increase in price by up to 20% if the deal was approved.

Source: European Commission

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