• Commission found to have been wrong to block O2 and Three merger, based on commitment to upholding four-player mobile markets in larger countries.
  • While not yet final, the court’s decision may fire the starting pistol for a renewed wave of consolidation among telcos struggling to manage competition.

EU court ruling could revive network consolidation

EU court ruling could revive network consolidation

Source: Kelly Sikkema / Unsplash

The General Court of the European Union ruled against the European Commission (EC) on its 2016 decision to block the merger of Telefónica UK and CK Hutchison (O2–Three). The court decision is likely to have significant repercussions in European communications markets where operators have been keen on consolidation, should it be upheld following any further appeal by the European authorities.

The proposed merger at the centre of the ruling, agreed after BT Group abandoned a planned O2 acquisition to acquire EE instead, was blocked by European authorities based on the anticipated reduction in competition that would accompany the number of UK mobile operators shrinking from four to three. However, the General Court, the second highest in the European Union structure, found that the EC reasoning was unsound, and based on unsubstantiated assumptions of market impacts and errors in interpretation of European law.

The decision may yet be appealed by the EC to the European Court Of Justice, but the General Court decision is significant in applying close scrutiny to the approach of the EC in decision‑making on mergers.

It appears likely that the EC Competition Commission — which is still led by Margrethe Vestager, who was Commissioner in charge at the time of the initial decision — will appeal to the European Court of Justice for a definitive answer from the body’s highest court. Nevertheless, the General Court ruling marks a significant milestone in enforcing closer legal scrutiny on EC decision–making on merger activity.

Errors and assumptions

The conclusion of the General Court was based on three principal factors:

  • That the EC had provided insufficient evidence of a probable decline in outcomes for consumers in the wake of the proposed merger. The Court did recognise that the Commission can prohibit acquisitions likely to create a more concentrated oligopoly even if no single dominant player will exist post‑merger, because they could reduce competitive pressure for all remaining market players. However, the “mere effect of reducing competitive pressure” was not considered sufficient to prove that consumer outcomes would deteriorate.
  • That the EC had not done enough to show that the merger would impede competition through its impact on network‑sharing arrangements in the UK. The EC was concerned because O2–Three would have had a hand in the two major network-sharing ventures in the country: MBNL with EE; and Cornerstone Telecommunications Infrastructure Limited with Vodafone UK. While the new entity could have potentially acted to the detriment of one of the ventures, to improve its own position, the Commission was considered to have not taken into account the opportunities for the other partners to amend or leave sharing arrangements to counter any adverse action. It was also stated that the Commission had not provided analysis to support its assumptions of negative impact.
  • That the EC blocked the deal on the basis of the negative impact on wholesale competition at the network level. It was noted that while MVNOs would have had one less network operator to work with, Three’s wholesale market share was small and its influence insufficient to consider it a competitive force in the wholesale sector.

Clocks won’t turn back, but consolidation could speed up

While the decision will not be able to reverse history, and wave into existence a unified O2–Three, it may give CK Hutchison — and other operator groups — the confidence to consider new acquisition activity, particularly at a time when providers may be struggling in competitive markets in the midst of an economic crisis.

And although the UK may not be bound by European decisions in a post‑Brexit world, the reasoning and arguments of the Court may hold weight in any future decisions on proposed mergers, particularly if the UK’s competition laws remain broadly unchanged, at least initially.

The grounds upon which the EC blocked the O2–Three deal were known to reflect the thinking of both Ofcom and the UK’s Competition & Markets Authority at the time. Should the authorities have similar misgivings surrounding the Virgin Media and O2 tie‑up, or any other consolidation moves that the merger sparks, their response and reasoning will need to prove robust enough to address any counter‑arguments based on the (so‑far) successful CK Hutchison case making its way through the European courts.