Takeover would have removed an important competitor and would have resulted in higher prices for mobile services in the UK
The European Commission (EC) has blocked the proposed acquisition of O2 by Hutchison under the EU Merger Regulation. It stated 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.
Today’s decision follows an in-depth investigation by the Commission of the deal, which would have combined Telefónica UK’s O2 and Hutchison 3G UK’s Three, creating a new market leader in the UK mobile market.
The takeover would have removed an important competitor, said the EC, leaving only two mobile network operators, Vodafone and BT’s Everything Everywhere (EE), to challenge the merged entity. The significantly reduced competition in the market would likely have resulted in higher prices for mobile services in the UK and less choice for consumers than without the deal.
The takeover would also likely have had a negative impact on quality of service for UK consumers by hampering the development of mobile network infrastructure in the UK. Finally, the takeover would have reduced the number of mobile network operators willing to host other mobile operators on their networks, noted the EC.
The EC also said the remedies proposed by Hutchison failed to adequately address the serious concerns raised by the takeover. These included that Hutchison would give access to a share of the merged entity’s network capacity to one or two mobile virtual operators, that it would divest O2’s stake in the Tesco Mobile joint venture, and to offer a wholesale agreement for a share of its network capacity to Tesco Mobile, as well as to offer a wholesale agreement for a share of its network capacity to Virgin Media.
Yet the EC stated that even if those offers were taken up, the mobile virtual operators would have been commercially and technically dependent on the merged entity, with limited ability or incentive to differentiate their offerings, including in terms of network quality.
Commissioner Margrethe Vestager, in charge of competition policy, said: “We want the mobile telecoms sector to be competitive, so that consumers can enjoy innovative mobile services at fair prices and high network quality. The goal of EU merger control is to ensure that tie-ups do not weaken competition at the expense of consumers and businesses.
“Allowing Hutchison to takeover 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.”
The UK mobile market is currently competitive; retail mobile prices are among the lowest in the entire EU. The UK is also one of the most advanced countries in the EU in terms of roll out of 4G technology and take-up of 4G services.
EE and Three have combined their networks as Mobile Broadband Network Limited, or MBNL. Similarly, Vodafone and O2 combined their networks to set up Beacon. This allows EE / Three, and Vodafone / O2 respectively, to share the costs of rolling out their networks but they continue to compete with each other for retail customers.
In addition to the four mobile network operators, there are a number of mobile virtual operators active in the UK retail mobile market. The Commission had serious concerns that the takeover would have reduced competition in the market, hampered the development of the UK mobile network infrastructure as well as the ability of mobile virtual operators to compete.
Combined, Three and O2 would have been the market leader with a share of more than 40%. They would have had much less incentive to compete with Vodafone and EE. This would have reduced choice and quality of service for UK consumers. The Commission’s analysis also showed that with the takeover retail mobile prices would have been higher for all UK operators than without.
Future development of entire UK mobile network infrastructure hampered, said the EC. The merged entity would have been part of both network sharing arrangements, MBNL and Beacon. It would have had a full overview of the network plans of both remaining competitors, Vodafone and EE. Its role in both networks would have weakened EE and Vodafone and hampered the future development of mobile infrastructure in the UK, for example with respect to the roll out of 5G, to the detriment of UK consumers and businesses.
The Commission therefore concluded that the proposed remedies would not have been able to prevent the likely negative impact on prices, quality of service and network innovation in the UK mobile sector as a result of the takeover, which is why it decided to block the proposed transaction to protect UK customers and businesses.
Jonathan Bell, VP marketing at OpenCloud, commented on the decision: “This decision follows Ofcom’s recommendation to Brussels that the merger could result in higher prices for consumers and business, disruption to the existing UK network arrangement, and a “shift in the balance of power” between operators and independent retailers. Later this summer, we’re expecting a similar decision from Brussels about the proposed merger of Hutchinson’s 3 Italia with VimpelCom’s Wind Group in Italy. The European Commission is sending a clear message that such acquisition and market consolidation will not be allowed if it means reducing competition to less than four major players.
“Instead of relying on acquisitions, operators must work to better service their customers themselves. Consumers can expect to benefit from better network speed and coverage in the short term, but it is difficult to turn these into long-term differentiators. Operators will need to invest in the creation of unique value-added services for their business and consumer subscribers. This is a sustainable route to enhanced customer satisfaction and loyalty, as well as incremental revenue,” added Bell.