Three is no longer a magic number in EU telecoms

Unless you have, as the well-worn saying goes, been holidaying in Mars in recent days you will no doubt be aware that there is one unhappy businessman in Hong Kong. Li Ka-shing, the chairman of CK Hutchison, has been foiled in his attempt to create a new mobile monster after the European Commission decided to block his plan to buy O2 UK and merge it with Three UK.

In this increasingly critical climate within the EU of mergers that reduce the number of domestic mobile network players, three is far from a magic number in a number of different senses.

For instance, Three may have been successful in its previous efforts to buy operators in Austria and Ireland, but its luck has now run out. Its planned deal to buy Wind in Italy also looks a lot more uncertain. Furthermore, regulators no longer like to see "only" three mobile players within a certain domestic market, even though they have previously allowed other deals to go ahead.

As CCS Insight's Kester Mann noted, "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."

So far, the feedback from analysts has been largely critical of the EU stance. Consultant Bengt Nordstrom had some particularly strong views, saying: "By maintaining a four operator national market, the EU is enforcing a law of diminishing returns for operators and investors -- and also consumers, in terms of quality of service."

Next steps are difficult to predict. In the face of increased competition from the new BT-EE monolith, O2 and Three UK could find it much harder to compete as mobile-only players, particularly as the need to invest in 5G and the IoT arises. Telefónica could well choose to find another buyer for O2 -- one that would not cause any regulatory waves.

The EC decision certainly has repercussions that extend well beyond the UK market. As pointed out by Fitch Ratings in a research note, mobile operators will now have to become a lot more inventive if they want to increase in scale. Measures could include seeking out mergers with less contentious players such as cable or fixed operators, sharing mobile networks or selling towers.

One thing is for sure: the decision is not useful ammunition for Vote Leave campaigners in the forthcoming UK referendum on its EU membership. Left up to Ofcom CEO Sharon White and the UK competition regulator, the CMA, Li's plan to buy O2 would have been shot down in flames months ago.--Anne

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