CMA: Three-O2 Merger Threatens Competition


April 2016

CMA: Three-O2 Merger Threatens Competition

The head of the Competition and Markets Authority has warned that the planned acquisition of mobile phone operator O2 by Three should be prohibited by the European Commission for fear that it would severely reduce competition in the sector.

The proposal would involve CK Hutchinson, who owns Three, purchasing O2 from Telefónica for £10.5 billion. Given O2’s 50% stake in Tesco Mobile, this merger could mean that the resulting company would effectively control a more than 40% share of the overall market, something that has prompted major concerns within the EU.

As such, Hutchinson has already said that they would consider selling of half of O2’s stake in Tesco Mobile in order to put off some of the worries being raised in Brussels.

However, whether or not the O2/Tesco stake is divested, the merger would reduce the number of mobile phone operators in the UK from four to three (the new entity, Vodafone and EE), something that the CMA warns could cause “long term damage” to customers.

There is already a precedent for problems coming out of mergers of exactly this kind. In Austria, the Financial Times reported, consolidation of telecoms networks “almost doubled some consumers’ smartphone bills in 2013 and 2014”.

Decisions to reduce the number of operators from four to three in Austria, Ireland and Germany have been approved in recent years by the EU under the previous competition commissioner Joaquín Almunia, but her successor, the incumbent Margrethe Vestager has been known for taking a more hard lined approach.

Ms Vestager made it clear that the precedent for four-to-three mergers in the telecoms sector is not something that she wishes to be bound by.

Speaking to the Financial Times, she said: “we do not work with magic numbers. Not even when three is involved.

“What limits us is the concrete case. Because we have to respect the specificities in each case. What is our prerogative is to serve the citizens to make sure post-merger that it is pro-competitive or neutral when it comes to the competitive situation.”

The European Commission has generally shifted their attitude towards these kinds of telecoms mergers with the blocking of a recent attempt by two Danish operators to join together figuring as something of a watershed moment.

The final decision on whether or not the merger will be accepted is expected to be reached in the next few days, after months of back-and-forth negotiations.

Ahead of the decision, the Competition and Markets Authority wrote a letter directly to Ms Vestager, praising the co-operation between the CMA, the European Commission and Ofcom so far, but warning fundamentally that the proposed merger “would give rise to a significant impediment to effective competition in retail and wholesale mobile telecoms markets in the United Kingdom”.

The letter, penned by the CMA’s chief executive Alex Chisholm, went on to say that while the Commission has been working hard to prevent negative fallout if the deal does go through, “the remedies offered fall well short of what would be required to meet the relevant legal standard”.

Most importantly, he argued, “the proposed remedies are materially deficient as they will not lead to the creation of a fourth Mobile Network Operator (MNO) capable of competing effectively and in the long-term with the remaining MNOs such that it would stem the loss of competition caused by the merger”.

For the deal to be acceptable, he said, there must be some measure put in place to ensure that there is sufficient means to carve out space for a fourth MNO, and “absent such structural remedies” he said, “the only option available to the Commission is prohibition”.

This was the same condition place upon the ill-fated attempted merger in Denmark, and the absence of an acceptable solution was the reason why the deal was blocked.

Chisholm ended his letter: “The CMA urges the Commission to act to prevent the long-term damage to the UK mobile telecoms market, and therefore to the interests of UK consumers, that both of our authorities have predicted will result from this merger.”

The issue as a whole is unsurprisingly being brought into arguments about whether or not the UK should remain in the EU.

There are those complaining that the fact that a decision that could adversely affect consumers in the UK is being made in Brussels is symptomatic of negative aspects of our EU membership.

However, it does appear that from what we can gather so far, Ms Vestager’s approach to these kinds of mergers is more or less in line with Mr Chisholm’s.