EC blocks proposed O2/Three UK merger; CK Hutchison considers legal challenge

The European Commission (EC) confirmed it will block CK Hutchison's plan to buy O2 UK and merge it with Three UK, citing competition concerns as its reason.

In a statement, the commission said it had strong concerns that UK mobile customers would have had less choice and paid higher prices as a result of the takeover, and that the deal would have harmed innovation in the mobile sector.

CK Hutchison immediately responded by stating it is "deeply disappointed" with the decision and would consider the possibility of a legal challenge among other options.

"We strongly believe that the merger would have brought major benefits to the UK, not only by unlocking £10 billion of private sector investment in the UK's digital infrastructure but also by addressing the country's coverage issues, enhancing network capacity, speeds and price competition for consumers and businesses across the country and dealing with the competition issues arising from the current significant imbalance in spectrum ownership between the UK's MNOs," the Hong Kong-based company added.

CCS Insight principal analyst Kester Mann said the collapse of the deal leaves both Three and O2 in a precarious position with uncertain futures in the UK. "It also casts serious doubt over the future structure of a European telecoms sector that had banked on the tie-up paving the way to further consolidation," he said.

The deal would have combined Telefónica UK's O2 and Hutchison 3G UK's Three, creating a new market leader in the UK mobile market and reducing the total number of mobile network operators from four to three.

Margrethe Vestager, the European commissioner in charge of competition, said allowing Hutchison to take over O2 at the terms they proposed would have been bad for UK consumers and bad for the UK mobile sector.

"We had strong concerns that consumers would have had less choice finding a mobile package that suits their needs and paid more than without the deal. It would also have hampered innovation and the development of network infrastructure in the UK, which is a serious concern especially for fast moving markets. The remedies offered by Hutchison were not sufficient to prevent this," Vestager said.

The EC highlighted concerns that the merged entity would be part of both network-sharing arrangements in the UK: MBNL and Beacon.

"It would have had a full overview of the network plans of both remaining competitors, Vodafone and EE," the commission said.

What comes next?
While it considers its options in the UK, CK Hutchison said it will now focus on working with the commission towards clearance of its proposed merger with Wind and Three Italia in Italy.

However, the likelihood of that deal winning approval also seems to be receding; the EC is now clearly signalling that it is less favourable to deals that reduce the number of MNOs within a market from four to three.

CCS Insight's Mann accused the EC of a lack of consistency on its approach to merger approvals.

"After similar deals were waved through in Austria, Ireland and Germany, the European Commission has either been hugely inconsistent in its merger and acquisition policy or failed foresee the alleged negative impact in these markets that have already consolidated," he said.

As for O2, the company could now be sold to another operator or private equity investor. Liberty Global CEO Mike Fries indicated this week that he could be interested in buying the operator in the event that the Hutchison deal was blocked, Reuters reported.

Mann noted that a sale or partial-sale to a deep-pocketed operator from outside the UK such as Softbank or America Movil is also plausible.

"For the time being however, O2's parent Telefónica may elect to hold on to an asset that in recent years has impressively out-performed rivals despite its uncertain future," he said. "Three's future now looks vulnerable as a sub-scale mobile operator in a market rapidly transitioning to multiplay."

For more:
- see the EC release
- see this Reuters article

Related articles:
Telefónica returns to organic growth in Spain
Ovum: Popularity of quad-play 'damaging' for pure-play mobile operators
Report: Telefónica mulls plan B as UK merger proposal wobbles
Report: CK Hutchison failing to convince EU regulators over O2 takeover
Hutchison says sale of Three or O2 to new MNO is a 'red herring'

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