Wave of consolidation in the EU telecoms market

2024-04-06 17:02

  • In late May 2020 the EU General Court (GC) overturned a 2016 decision by the EU Commission to block a proposed £10.2bn merger between O2 (owned by Telefonica) and Three (CK Hutchison). The merger had initially been blocked because of concerns that it would lead to higher prices and less choice for consumers. However, in the latest ruling the General Court, the EU’s second-highest court, questioned the assumptions behind that decision, saying that the Commission had failed to demonstrate that Three was a competitive force in the UK market and that Three and O2 could be considered close competitors. The court’s intervention has cast doubt over the strength of the Commission’s competition policy, and may pave the way for a wave of consolidation in the EU market.

    The question vexing competition policy-makers is: how many big players are needed for healthy competition in telecoms markets? On both sides of the Atlantic, four has long been regarded as the magic number, although the US has generally taken a more laissez-faire approach to telecoms regulation. In April 2020, following years of negotiations, a proposed US$26bn merger between T-Mobile and Sprint was approved, bringing down the number of major US market competitors from four to three. The chairman of the Federal Communications Commission (FCC), Ajit Pai, believes that the deal will promote – rather than damage – market competition.

    The EU Competition Commission, Margrethe Vestager, takes a different view. Before she was appointed in 2014, the Commission used to wave through merger proposals that cut the number of players from four to three, notably in Germany and Austria. However, Ms Vestager not only believes that having just three players harms consumers and market competitiveness, but is also unconvinced by the sell-offs and remedies the merger partners usually offer. Ms Vestager’s biggest intervention was to block the O2-Three deal in May 2016, marking the first time that the Commission had formally ruled against a merger in a major European market. Ms Vestager had earlier voiced opposition to a proposed merger between Telia and Telenor in her native Denmark in 2015, a deal that was subsequently abandoned. Other EU operators are likely to have shelved or placed consolidation plans on hold following the O2-Three ruling.

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    New merger wave?

    This latest ruling from the GC could see operators start to dust off these plans once more. Previously, EU operators have cited restrictive EU competition policies as a barrier to business, making it harder for them to invest in next-generation technologies such as 5G and to compete against over-the-top (OTT) competitors such as WhatsApp and Facebook. Operators further argue that high data volume and demand, coupled with price regulation, contributes to the falling average price per gigabit of data. This makes it even more challenging to maintain healthy levels of profit and return.

    Thanks to the coronavirus (Covid-19), which has squeezed operators’ margins still further, there is pressure across Europe to cut debt, support falling share prices and boost returns. Operators will consider several solutions, from tower asset sales to restructuring, spin-offs and deleveraging. Adding new service offerings (or improved terms for existing ones) could boost revenues. Some will also be considering consolidation.

    Markets with four major operators could be primary targets, as well as those where the pandemic has taken a particularly big toll on the economy. Denmark and Sweden are candidates, as is Spain, which has five operators. In terms of potential acquirers, low-cost entrant MasMovil is growing fast and could have spare cash, after Spain’s ministry of industry approved a €3bn takeover bid from a private equity consortium consisting of KKR, Cinven and Providence. MasMovil currently has around 13.5% of the Spanish market and is fast catching up with Vodafone Spain (22.7%) and Orange (25%). A tie-up with another Spanish operator could be on the cards.

    Gates flung open?

    However, the gates to telecoms consolidation are not open yet. Central to the GC’s ruling is “the significant impediment to effective competition” (SIEC) rule, which was introduced as part of a host of reforms to EC merger regulation in 2004. In order to block the O2-Three merger, the Commission had to demonstrate with strong probability that an SIEC exists. The standard of proof, according to the GC, should exceed a “more likely than not” interpretation, but need not be as high as (in legal terms) a “balance of probabilities”. The technicalities are difficult to untangle, but the GC’s ruling constitutes a stark challenge to a Commission that has, until now, enacted competition policy largely at its own discretion.

    The Commission has two months to appeal the decision, and is likely to do so – especially given the challenges facing the sector right now. Both the EC and national authorities are concerned that EU telecoms companies are vulnerable to state-backed foreign takeovers, after market valuations fell amid the coronavirus crisis. The GC’s ruling would make it difficult for the EC to block such takeovers in the interests of regional players. The EC’s appeal is likely to rest on two arguments: that GC judges misinterpreted the standard of proof applied in the O2-Three case, and that the evidence around the competition effects of the deal was strong. The EC also holds out some hope that the European Court of Justice will swoop to its defence, by overturning the GC’s ruling.

    However, the EC’s appeal is likely to take two years to reach a resolution, during which time uncertainty will prevail. National regulators may step up their efforts to police mergers: most are increasingly opposed to consolidation, given the vulnerability of companies previously seen as European champions. Research carried out by various regulators has previously concluded that a reduction in market players harms competition, a conclusion also reached by the Body of European Regulators for Electronic Communications (BEREC) approximately two years ago.

    Appetite for consolidation in the EU may also be curtailed by divergent regulatory frameworks across the EU and the lack of cross-border synergies. Telecoms services and products remain highly localised, while consumption patterns differ from market to market. While the GC’s ruling has left EU operators rejuvenated, national regulators and the EC are likely to redouble their efforts to prevent consolidation that could be damaging to Europe’s recovery.

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