UPDATE Competition Watchdog Tries to Halt O2 and Three UK Merger

The Competition and Markets Authority has today written a last ditch letter of appeal that urges the European Commission not to approve the proposed £10.25bn merger of Three UK (CK Hutchison Holdings) and O2 (Telefonica), which it says will result in “long-term damage to the UK mobile telecoms market.”

The merger, which was originally agreed in March 2015 (here), has always attracted a disdainful eye from the regulators because it threatens to reduce the number of primary Mobile Network Operators (MNO) in the United Kingdom’s mobile market from 4 to 3. Both Ofcom and the CMA believe that this will hurt competition and push up consumer prices.

On the flip side Three UK and O2 see the deal as a way to more effectively compete with Vodafone and BT (EE). Equally customers might benefit from improved network coverage, depending upon how the existing network sharing arrangements are managed, and Hutchison has also made various commitments to retain low prices and improve market competition (here).

Never the less Ofcom and the CMA have remained doggedly determined to stop the deal, although the final decision rests with Europe and so today’s Open Letter starts off with oodles of praise for the work being done by the EC’s case team.

Indeed the EC shares many of Ofcom and the CMA’s core concerns with regards to “increased prices and/or a reduction in the quality offered to UK consumers,” but with that out of the way the letter then shifts its tone.

Alex Chisholm, CMA Chief Executive, said:

“While I appreciate the considerable efforts made by the Commission to explore remedies with the merging parties that seek to eliminate the adverse effects identified, it is clear that the remedies offered fall well short of what would be required to meet the relevant legal standard, as detailed in our case submissions.

The proposed remedies are materially deficient as they will not lead to the creation of a fourth Mobile Network Operator (MNO) capable of competing effectively and in the long-term with the remaining three MNOs such that it would stem the loss of competition caused by the merger. In addition, they fail to address concerns arising from the presence of the merged entity in both the network sharing arrangements, including the greater risk of coordination that this brings.

The only appropriate remedy that would meet the criteria that the Commission is bound to apply (ie that the remedies eliminate the competition concerns in their entirety, are comprehensive, effective and capable of ready implementation) is the divestment – to an appropriate buyer approved by the Commission – of either the Three or O2 mobile network businesses, in entirety, or possibly allowing for limited ‘carve-outs’ from the divested business. The divestment would need to include the mobile network infrastructure and sufficient spectrum to ensure a commercially viable fourth MNO in the UK. Absent such structural remedies, the only option available to the Commission is prohibition.

The CMA urges the Commission to act to prevent the long-term damage to the UK mobile telecoms market, and therefore to the interests of UK consumers, that both of our authorities have predicted will result from this merger.”

Many observers predict that the EC might choose not to outright block the merger, although they may attach significant concessions to such a deal and ordinarily that would be enough to scupper it.

However the UK regulators fear that Hutchison’s boss is so determined to push forward with the merger that he may do so even when faced with significant obstacles, which would leave Ofcom in the position of having to establish a 4th mobile operator to replace the position that Three UK held (very expensive and technically difficult, with no guarantee of success).

The European Commission are expected to reach a final conclusion by the end of next month and in the meantime this debate seems to have becoming increasingly political.

UPDATE 2:23pm

Cable operator Virgin Media has given its not especially pleased response to the CMA letter. Mind you that’s not surprising given the recent reports that Virgin has agreed a deal to buy capacity over the combined network (here).

Tom Mockridge, Virgin Media CEO, said:

“Less than three months ago the CMA approved the merger of BT/EE, without remedies, despite concerns that this concentrated too much valuable spectrum in the hands of one provider. BT/EE now has 45% of total UK spectrum, including 60% of the higher frequency spectrum best-suited to 4G services, particularly in urban areas. In comparison Vodafone has 28% of UK spectrum, O2 has 15%, and Three has 12%. This is the very reason it is now difficult to create a new, fourth mobile network operator.

A combined O2/Three would provide a counter balance to the strength of BT/EE, offering an alternative source of capacity to other providers who will drive competition in their own right.”