Consolidation has been on the telecoms industry's agenda for a number of years. In particular, mobile telecoms providers have seen their revenue endangered by the emergence of companies such as WhatsApp and Skype. Mergers such as Hutchison/O2 Ireland and Telefónica/E-Plus in Europe, and the abandoned attempts of AT&T and Sprint to acquire T-Mobile in the United States, have been seen as initiatives to improve cost base and efficiencies by increasing the scale of operations.
These consolidation efforts have inevitably attracted intense regulatory scrutiny. Former EU Competition Commissioner Joaquín Almunia publicly lamented the fact that although 80% of mobile phone subscriptions were held with four leading European groups, there was still no "single market for cell phones" whereby customers could buy and use mobile services freely across the European Union. Nevertheless, during his tenure Almunia approved four national mobile telecoms mergers, albeit with conditions. Almunia's successor, Margrethe Vestager, has publicly warned against "excessive consolidation" in the industry. Some two months after this warning, the proposed Danish joint venture between Scandinavian heavyweights Telia Sonera and Telenor was abandoned on the grounds that the parties could not agree with the European Commission conditions that would dispel the regulator's concerns. While no formal decision will set out the commission's thinking in detail, the question remains of whether wireless mergers will become even more difficult in Europe.
The recent wave of consolidation in Europe started in 2012 when Hutchison acquired Orange Austria. The deal involved the merger of the two smallest of four national mobile network operators (MNOs). While the merged entity would not have become the market leader, the commission nonetheless required commitments in order to approve the deal. Hutchison committed to divest spectrum to allow a new network operator to build up its own infrastructure (an offer that has not been picked up by any rival). Hutchison also committed to provide wholesale access to its network to a maximum of 16 mobile virtual network operators (MVNOs) for 10 years, and up to 30% of the network capacity. Hutchison ensured that at least one of these wholesale access agreements was concluded before the closing of the deal, entering into an agreement with Liberty Global subsidiary UPC. However, UPC launched its activities as an MVNO only in December 2014, and earlier that year the Austrian telecoms regulator had claimed that prices for certain user groups had increased substantially since the merger.
The failure to attract the entry of a new sizeable MVNO appears to have had an impact on the commission's assessment of subsequent proposed transactions. It approved four-to-three mergers in Ireland (Hutchison/O2 Ireland) and Germany (Telefónica/E-Plus), but with substantial remedies. The acquirers committed to sell up to 30% of the merged company's network capacity for a fixed price. The fixed payments for capacity set incentives to use that capacity immediately and should, as the commission noted, be more effective than the typical pay-as-you-go model presently used by MVNOs in Europe. Under this model, MVNOs pay for network access according to the actual usage of their subscribers. In Ireland, Hutchison concluded two MVNO agreements with Liberty Global's UPC and Carphone Warehouse, and in Germany Telefónica Deutschland decided to sell the committed amount of capacity to only one player, Drillisch. In both cases the commitments contain options for the MVNOs to acquire spectrum in order to become MNOs at a later stage.
The playbook seemed therefore clear: four-to-three mergers are possible, provided that there is strong MVNO competition in the market. But is that still true after the abandoned Telia Sonera/Telenor deal, the first mobile merger scrutinised by Vestager? While the commission will not publish a formal decision because the notification was withdrawn, the answer is likely to be yes.
The fact pattern in Telia Sonera/Telenor is different from the previous mergers. The deal included the setting up of a joint venture rather than an outright acquisition, which led to concerns of coordination in other Scandinavian countries where the parties operated. Unlike previous transactions, the joined operation would have become the market leader in Denmark.
However, arguably none of these factors was what led the commission to take the "road to prohibition" referred to by Vestager. It seems that the commission was concerned that one of the remaining MNOs would not be an effective competitor in the wholesale market. Unlike in the previous deals, this would have left the market with only two credible providers of wholesale infrastructure to MVNOs.
Therefore, the Telia Sonera/Telenor assessment does not exclude the possibility of four-to-three mobile mergers, provided that there remain three credible MNOs with sufficient wholesale capacity. For predictions of the commission's attitude regarding national mobile telecoms concentrations, it seems more important to watch the post-merger developments in the Irish and German mobile telecommunication markets. Should prices increase as a consequence of recent deals, this will have an impact on the commission's attitude towards national mobile telecommunication deals in the mid and long terms.
With two other merger decisions arriving on her desk soon (the Hutchison/VimpelCom joint venture in Italy and Hutchison/O2 in the United Kingdom), Vestager and her services will likely have the chance to spell out in more detail the boundaries of "excessive consolidation".
For further information on this topic please contact Werner Berg or Miklos Mudrony at Baker & McKenzie by telephone (+32 2 639 36 11) or email (firstname.lastname@example.org or email@example.com). The Baker & McKenzie website can be accessed at www.bakermckenzie.com.
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