Analysts: EC MNO merger precedents bode well for Hutchison Whampoa's UK play

European Commission (EC) precedents allowing a reduction in the number of mobile network operators (MNOs) in Germany and Ireland could prove key to Hutchison Whampoa's bid to acquire Telefónica's O2 UK, Jefferies International analysts said.

In a research note emailed to FierceWireless:Europe, the analysts said that the proposed deal would likely fall under the jurisdiction of EC anti-trust regulators, and that precedents set on similar deals in 2014 requiring the merged entity to release capacity to mobile virtual network operators (MVNOs) would work well in the UK market, where Virgin Media and BSkyB (Sky) may seek to shore up current virtual network deals.

"Making capacity available to MVNO/resellers on a 'raw materials' basis was a remedy that the EC mandated in Germany and Ireland," the analysts stated, referring to Three Ireland's acquisition of O2 Ireland, and Telefónica Deutschland's take-over of KPN's German business E-Plus in 2014.

"In the UK, we believe there is a longer list of more powerful telco/media brands that could be willing to make use of a similar opportunity including TalkTalk, Virgin, Sky, [and] Tesco Mobile," the analysts said.

Hutchison Whampoa sparked speculation regarding the reaction of competition regulators when it confirmed last week that it has entered into exclusive talks with Telefónica regarding a £10.25 billion (€13.6 billion/$15.3 billion) acquisition of O2 UK. The deal, which would create the UK's largest MNO by subscriber numbers, is tipped to face close scrutiny because it will cut the number of full MNOs in the market from four to three.

While Jefferies analysts said the reduction in full MNOs means the deal falls squarely under EC jurisdiction, they noted that UK regulator Ofcom may play a role because it could also be considering a merger between BT and EE, after those companies entered into exclusive talks in December.

The analysts noted a combined O2 UK and Three UK "would have a strong spectrum position with 2x32.4 MHz of sub-1 GHz bandwidth (a 46% share), plus 2x20.8 MHz at 1800 MHz (29%) and 2x24.6 MHz of paired 2.1 GHz (41%)."

Jefferies analysts also believe that MNO consolidation will be good for UK mobile revenues in the long run. Without a reduction in operator numbers, "the UK's mobile-only players faced a future where revenue share would likely be squeezed by a combination of BT-EE leveraging modest retail market share starting points in both mobile and fixed to drive cross-sell while Virgin Media/Sky would continue to benefit from differentiated product to hold their own."

Market consolidation is likely to lead to higher prices for consumers. Recent figures from Arbeiterkammer Wien--the Vienna Chamber of Labour--show prices in Austria have increased following Three Austria's acquisition of Orange's local business Austria in 2013. Basic voice and SMS tariffs grew by around 29 per cent between September 2013 and December 2014, and average mobile data package prices by 78 per cent.

While Jefferies analysts noted there is no evidence yet to suggest prices in Germany are increasing in the same way as in Austria, they argue that a requirement to lease capacity "could be more effective in the UK than in Germany/Ireland as the prospective MVNOs we named above that could make use of this have been competitive outside the narrow 'value' niche."

For more:
- see this Jefferies International research note

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