Hutchison, O2 deal could hit stiff opposition in UK, EU

19 January 2016. By Dafydd Nelson.

Sharon White, Britain’s top telecom regulator, has warned that CK Hutchison Holdings’ plan to buy rival wireless operator O2 UK could leave customers paying higher prices.

Her concern may spell trouble for deal, even though the Ofcom chief has no control over an EU investigation into the transaction.

White, a former Treasury official who managed the government’s austerity drive, met with EU antitrust chief Margrethe Vestager in Brussels last week to discuss the probe.

She may have received a sympathetic hearing, given that both women have railed against too much consolidation in the telecom industry, arguing that competition, not consolidation, drives investment in the business.

That meeting of the minds may worry executives at Li Ka-shing’s Hutchison.

Company officials are expecting Vestager’s office at the European Commission to file formal objections to the O2 UK deal before the month is out, it is understood. Hutchison spokespeople were unavailable to comment.

Transformational deal

The buyer is likely to have argued that the merger should be cleared because Hutchison is the smallest of the UK’s four wireless networks and needs to grow through acquisitions.

A takeover of Telefónica’s O2 UK would transform Hutchison into the UK’s No. 1 wireless operator by subscriber numbers.

Hutchison is probably hoping to secure commission clearance for the 10.25 billion pound ($14.65 billion) deal by following a now well-trodden path — by selling wholesale access to its wireless network at a preferential rate.

But concerns are mounting that the commission may approve the transaction only if a new fourth wireless network operator enters the UK market. As things stand, the country’s top wireless operator is EE, a joint venture between Orange and Deutsche Telecom. O2 UK is the second-biggest player, followed by Vodafone at No. 3.

Danish chill

The jitters can be traced to an ill-fated wireless joint venture between Nordic operators Telenor and TeliaSonera in Vestager’s homeland, Denmark.

In reviewing that deal, the antitrust chief made it clear that “the creation of a fourth mobile network operator” would have been needed for the EU to clear the venture. With no new player in sight, the deal fell through.

In a time of tight finances and surging wireless demand, mobile operators have been reluctant to enter new territories. Data-hungry consumers are forcing companies to invest heavily in network improvements. A new entrant would probably get a limited customer base, which would yield unsatisfactory returns.

But Vestager and White reject the argument that more consolidation will spur greater network investments. Vestager says she has seen no “compelling evidence that would support the existence of a tradeoff between competition and investment.”

White has used similar language, saying that Ofcom analysis showed “no relationship between consolidation and investment.” Last October, she told an audience at the London School of Economics that the watchdog believes “four operators is a competitive number” for the UK mobile market.

More recently, White said she was “very concerned that we’re heading toward higher prices” in Britain if Hutchison is allowed to buy O2 UK.

But the European Commission, not Ofcom, will rule on the transaction.

National influence

In recent years, national authorities have tried to influence the commission’s response to telecom mergers, without success. German antitrust officials, for example, are understood to have pressed for stricter conditions on Telefónica’s takeover of rival E-Plus — a deal that cut the number of wireless operators in Germany to three, from four (see here).

In the end, the EU cleared the buyout subject to an access remedy. The Spanish operator also had to pave the way for a new network owner to enter the market, but actual entry wasn’t a requirement and no company has since taken up the offer.

But that clearance, and several other similar telecom merger approvals, took place under the leadership of Joaquín Almunia. Vestager replaced Almunia in November 2014, and appears to have taken a more combative stance to telecom deals.

Like White, Vestager has voiced suspicions that wireless mergers may spur higher prices, not greater network investment. That mindset may make the commissioner responsive to calls from White to make sure the UK market has four mobile operators, not three.

Until now, Vestager has reviewed one four-to-three wireless deal — in Denmark, where the pre-existing competitive landscape was always going to be a challenge for the parties (see MLex comment here).

Hutchison will soon find out whether Denmark was unique, or whether the perceived regulatory crackdown is real and Vestager’s views really do mirror those of White.