Suzanne Rab – barrister in EU and Competition Law at Serle Court Chambers: European Commission blocks Hutchison/Telefónica tie-up

In a move that was largely expected, the European Commission (Commission) has prohibited a merger between CK Hutchison’s “Three” and Telefónica UK’s “O2” mobile businesses.  EU Commissioner Vestager said that the transaction which would have created the UK’s largest mobile network presented “significant competition concerns” and would have led to higher prices, less innovation and fewer choices for consumers.  The prohibition is the first mobile merger to be blocked outright by the Commission.

The decision follows an in-depth probe after the Commission raised “serious doubts” that the merger would harm competition.  On 11 May the Commission confirmed its view that the creation of a new market leader would have removed an important competitor and that with two remaining players – Vodafone and Everything Everywhere – this was insufficient to ensure sufficient competition in the UK mobile market.

The Commission had exclusive jurisdiction to review the competition aspects of the transaction under the ‘one stop shop’ procedure of the EU Merger Regulation that governs large scale mergers with a European dimension. The Commission refused a request from the UK Competition and Markets Authority (CMA) to review the transaction.  Although the Commission accepted that the merger affected retail and wholesale mobile telecommunications markets in the UK, the Commission concluded that it was better placed to deal with the case.

The UK authorities have been vocal in their opposition to the merger.  The CMA urged the Commission to block the merger unless the parties were required to sell off at least one network’s infrastructure and spectrum.  Then CMA Chief Executive Alex Chisholm in a letter to the Commission, though polite in tone, was unequivocal in stating the CMA’s view that absent of such remedies “the only option available to the Commission is prohibition”.  Sharon White head of Ofcom was also opposed to the merger.  Both UK regulators have publicly stated their view that the final decision is the right outcome for consumers.

The veto of the transaction by the Commission has rather bucked the trend of recent EU clearances of mobile mergers where remedies have been found to allay competition concerns.  Examples include T-Mobile/ Orange (UK); Hutchison 3G/ Orange (Austria); Hutchison 3G/ Telefónica (Ireland); and Telefónica/ E-Plus (Germany).  The trend of clearances suggested that a reduction in the number of major players from four to three did not necessarily present an insurmountable barrier to clearance, provided that merging parties create the conditions for smaller players who don’t own infrastructure to use their networks on non-discriminatory terms.

The Commission views the UK mobile market as “very competitive”.  The merging parties put forward competitive benefits for the transaction by unlocking private sector investment, as well as improving network capacity, speeds and price competition for consumers.  Yet this was a case where the Commission concluded that three players was not enough to sustain that competition.

The Commission has disclaimed that there isn’t anything new in this decision but it raises a question why acceptable remedies could not be found.

The answer lies partly in the fact that a Three and O2 combination would have consolidated an interest in two network sharing arrangements owned respectively by Three and EE and Vodafone and O2.  The Commission did not view this as healthy for competition. A possible remedy might have been the introduction of a fourth mobile operator in one of the network sharing arrangements to replace Three or O2.  Hutchison apparently pursued such a remedy but it appears that there were no takers due to concerns that they would not have sufficient spectrum.  What Hutchison did put forward was not enough to address the Commission’s concerns even though the package was in some respects more extensive than in the Austrian and Irish cases.  For example, Hutchison offered to sell O2’s interest in a joint venture with Tesco Mobile and enter a wholesale capacity agreement with Virgin Mobile but these concessions were deemed inadequate.  It also offered to open the merged networks to potential mobile virtual network operators but this also fell short of the structural remedy that the Commission was seeking.

The decision is the first prohibition of a merger by the Commission since it blocked Ryanair’s takeover of Aer Lingus in February 2013.  Although the vast majority of mergers that are reviewed by the Commission are approved unconditionally at the first phase, there will be cases where remedies cannot be found.  Does the decision signal that the bar has been raised for future clearances?  Hutchison has said that it is considering an appeal.  In the meantime, mobile dealmakers will be considering carefully what concessions may be needed as the price for clearance and without destroying the underlying commercial logic of the transaction.