BT/EE merger gets final competition approval: is there still room for further consolidation in the UK telecoms market?

BT plc’s acquisition of EE was finally approved by the UK Competition & Markets Authority (“CMA”), on 15 January 2016 – read more. The decision does not come as much of a surprise to those following the case. The merger had already been approved on a provisional basis by the CMA at the end of October 2015 – read more.

This time round the CMA’s conclusion was unanimous in all of the markets reviewed. In the provisional report, the inquiry group had been divided in relation to the impact of the merger on the wholesale mobile market, with half the group finding the merger could be expected to result in a substantial lessening of competition (“SLC”) on this market. However, in order to have sustained a finding of SLC, the group would have needed a 2/3 majority. 

The CMA’s decision now enables BT and EE to push ahead with integrating their two networks. However, there still remains a question mark over the future of BT Openreach. A number of stakeholders raised wider concerns about the telecoms sector, calling for structural separation of Openreach from the rest of BT. The CMA stopped short of considering this, pointing out that the CMA’s role was confined to examining the effects of the merger and not to conducting a more general review into the current state of telecoms regulation in the UK. The matter was left for Ofcom to review. The thorny issue of what to do with Openreach will form a key part of Ofcom’s Strategic Review of Digital Communications, due later this year. So for now the message is business as usual, but watch this space.

What does the decision signal for further (4-3) consolidation in the UK telecoms market, and in other European telecoms markets? 

At one level, possibly not much. There was limited overlap between the activities of BT and EE other than in the wholesale mobile market, and therefore minimal market share accretion. So overall, no real change in the parties’ positions in the market, with the CMA taking the view that the remaining mobile network operators (“MNOs”) – Vodafone, Three, O2 – would continue to exert competitive pressure. And that additional competitive pressure would come from the various mobile virtual network operators (“MVNOs”) that compete with BT/EE and the other MNOs (by offering their services over the MNOs’ networks) in the UK.

Of course, this ignores the fact that Three and O2 are soon to merge read more. At least that is the intention, unless Ms Vestager and her team at the Commission finally take the view that 4-3 mergers in EU telecoms markets should be blocked. The Commission’s provisional findings are due during the course of the week commencing 18 January 2016. There were certainly hints last year that 4-3 telco mergers would be blocked when – unable to agree the concessions needed to get the deal cleared – TeliaSonera and Telenor abandoned their proposed joint venture in the Danish market (Ms Vestager’s home market) – read more. In that case, the parties were facing the prospect of having to sell-off up to 40 per cent of their network infrastructure as a condition to merger approval. However, the parties – and the Commission – were quick to try to distinguish the facts of the case as not representative of any ‘hard’ policy within the Commission on 4-3 telco mergers.

Although the Commission has to date been able to avoid the difficult issue of just how much consolidation should be allowed in European telecoms markets, this cannot continue. The Three/O2 merger will raise some very tricky competition issues regarding 4-3 mergers. This is not unchartered territory for the parties, both having been through a ‘trial run’ a few years ago in Ireland when Three acquired O2’s Irish arm. In Three’s case, it has also had experience in Austria when Three acquired Orange Austria at the end of 2012. Whether it will be third time lucky again for Three remains to be seen, and if so on what terms. In previous cases, the Commission has hinted at creating the conditions for a fourth MNO to enter the market, but to date has fallen short of mandating this.

For example, while the commitments packages often involve, among other things, some form of spectrum rights being granted to third party competitors alongside divestment of assets, these packages tend to lack the necessary breadth and scope to support a new standalone player. Recent press reports suggest that Ms Vestager is returning to her original position that it is necessary to have at least 4 MNOs in each country to avoid higher prices and ensure proper customer choice. This has led some analysts to speculate that in order to get the Three/O2 deal over the line the parties will have to create a spin-off “challenger”, with others speculating that the deal will simply not be approved.

Others in Europe who will be watching the Commission’s approach in the Three/O2 case carefully, include Three’s sister operation in Italy and Orange in France, which has recently announced negotiations to acquire Bouygues Telecom. If approved – and at this stage it’s not entirely clear whether this approval would be coming from Paris, or Brussels – this latter transaction would also result in a 4-3 reduction of players, combining the second and third largest MNOs in France. Press reports suggests that Orange has already anticipated ‘sell-offs’ and is negotiating with Numericable-SFR and Iliad to try to come to a deal over the potential sale of part of Bouygues Telecom’s mobile spectrum, customer base, network and shops.
The Commission’s provisional findings in the Three/O2 case – and in particular, the nature and scope of concessions required by the Commission – may provide guidance to Orange as to whether its current negotiations with Numericable and Iliad are on the right track.

Are 4 players really necessary, or should ‘3’ be the magic number? 

Much has been said in recent years by merging parties, the Commission, national competition authorities and national telecoms regulators such as Ofcom about what might be the ‘right’ number of players in the market. Such debate – although interesting – risks diverting attention away from the real issue for the Commission and national competition and telecoms regulators, namely how best to ensure that the right market conditions exist for competition to flourish in the relevant market(s) and how best to ensure that any planned mergers do not threaten to undermine this i.e. by significantly distorting competition in the relevant market(s) (the test under the UK merger rules). 

To date, competition authorities have tended to approach the issue of competition from the perspective of consumer prices. What’s interesting about the possible Orange/Bouygues merger is that there is broad agreement that consolidation would lead to higher prices, by putting an end to the current price war in the French mobile market. The parties and those in favour of the deal are focussing on the potential for increased investment incentives, and not lower consumer prices, if the merger is allowed to proceed. It is unclear whether this approach will be successful in France or in similar merger cases in other jurisdictions. 

Investment is certainly an important factor. The Commission’s Digital Single Market initiative (read more) is also looking at ways in which operators (both fixed and mobile) can be incentivised to invest in key products and services, such as wider roll-out of high speed broadband. The DSM initiative is considering among other items the possibility of imposing a universal service obligation in respect of a basic broadband service. However, it will necessarily be some time before any proposals are crystallised and then implemented at a national level. 

The Orange/Bouygues deal could be an opportunity for national competition authorities to step away from their traditional approach of looking at competition in terms of consumer prices, and think about this differently. Whether they will get the opportunity to take such a bold step and even if they do, whether they actually will, remains to be seen. What does seem clear is that the current wave of consolidation in European telecoms markets, these types of thorny questions over what the desired level of competition should be, how it should be understood (e.g. price versus investment) will become more important.