UK Competition Regulator to “Fast Track” GBP12.5bn BT and EE Merger

The Competition and Markets Authority has predictably approved last month’s request by BT for their £12.5bn merger with mobile telecoms giant EE to be “fast-tracked” to a full in-depth phase 2 investigation of the acquisition, which should save a little time.

BT, which believes that its acquisition could “enhance” rather than hurt competition in the UK telecoms market (here), would like to get the investigation cleared before the original March 2016 prediction. In theory it should be fairly straight forward because BT is a predominantly fixed line operator, while EE is largely mobile and there’s very little overlap.

But rivals like Vodafone, Sky Broadband and TalkTalk fear that the combined group would have too much power to undercut their own services, not least by combining the strengths of BT’s national fixed line and mobile networks. Ofcom also don’t like the idea of seeing the UK mobile sector reduced to three primary operators.

Ordinarily the CMA’s Phase 1 process (i.e. evidence gathering and oral hearings) would require them to spend a statutory period of 24 weeks on the investigation, which can also be extended by up to 8 weeks if needed. After this they must choose whether or not to proceed to a full investigation (Phase 2), which would decide how the merger should be handled (i.e. the CMA may give the deal unconditional clearance, stop it entirely or more likely attach some conditions to it).

At this point it may seem strange to some that BT would wish to push itself into the Phase 2 stage, but the reality of mergers at this level is that they will always attract a full investigation and as such it simply makes the process quicker if you can skip right to the primary phase.

The CMA agrees with BT on this point and found that the transaction meets the test for reference in that it gives rise to a “realistic prospect of a substantial lessening of competition in relation to the supply of wholesale access and call origination services to mobile virtual network operators and fibre mobile backhaul services to mobile network operators in the UK“. Fast track approved.

Andrea Coscelli, CMA Boss of Markets and Mergers, said:

“BT and EE are leading suppliers of UK telecommunications services and together they will have a strong presence in many telecommunications markets. They also supply important inputs at the wholesale level, which enable other communications providers to compete at the retail level in the provision of mobile services.

We have found that there is a real risk that the merger could reduce their incentives to supply these inputs and that this could have a detrimental impact on the retail mobile market.

BT and EE have recognised that the issues in this case are complex and that the test for reference at phase 1 would be met. They therefore requested use of the fast track procedure and, after due consideration, we believe this to be appropriate.”

It’s worth pointing out that Ofcom appears to have pre-empted some of the CMAs concerns and recently proposed (here) that BT should be forced to open up their Dark Fibre for use by rival operators (i.e. these are cable ducts with un-lit fibres that have capacity for coping with future demand).

Such a move could make it easier and cheaper for rival ISPs to deploy faster broadband services into new areas, although we expect plenty of squabbles over the price and those could run for a long time. On top of that it’s also possible that the merger may force EE to relinquish some more of their radio spectrum to rival operators.

However, assuming the deal does complete, then Orange will hold a 4% stake in the new business (plus around £3.4bn in cash) and EE’s other parent, Deutsche Telecom, should end up holding 12% with a seat on the board. Some recent reports have hinted that this could eventually leave BT exposed to being gobbled by Deutsche Telekom, but that is very early speculation and realistically nothing, if anything at all, will happen about this for several more years.

In the meantime BT and EE are firmly focused on the problems of today and in an ideal world they’d surely like to see this all done and dusted well before the end of 2015, which would allow them to get on with the complex task of merging their networks and launching new products. Today’s news certainly makes this outcome more likely.

Lest we not forget that Three UK and O2 are also attempting to tie the knot, which may be even more challenging given that they’re both mobile operators and would risk leaving the market with only three primary mobile providers.