Ofcom Effectively Gives Green Light to GBP12.5bn EE and BT Merger

BT’s proposed £12.5bn UK merger with mobile giant EE has been given a boost after the national telecoms regulator, Ofcom, advised the Competition and Markets Authority (CMA) that it didn’t have any major objections to the deal and suggested that existing regulation could tackle most concerns.

At present BT claims that its acquisition would “enhance” rather than hurt competition in the UK telecoms market (here) and they aim to get the deal completely cleared by March 2016, while the CMA is aiming to issue its final report before the end of November 2015.

However BT’s rivals, such as 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 their extensive national fixed line network with EE’s mobile platform to cut prices, impact backhaul supply and or limit the market’s MVNO options.

But Ofcom already appears to have pre-empted some of these fears through its recently proposed plan to force BT into opening up their Dark Fibre lines (i.e. cable ducts with un-lit fibres that have capacity for coping with future demand) for use by rival operators (here), although we still expect to see lots of squabbling over price and access.

In consideration of the above it’s perhaps no surprise to find that Ofcom’s 69-page long submission to the CMA’s investigation (read it in full here) appears to put precious few obstacles in front of the deal, although a few smaller concerns were noted.

Ofcoms Statement (Extract Linked to Mobile Backhaul)

We recognise that, as a vertically integrated firm, BT may have the incentive to discriminate in favour of its downstream divisions, and we impose regulation to address such concerns. We believe the current and future proposed regulation that we apply to BT will limit BT’s ability to discriminate over price, quality and innovation in the provision of leased lines.

While we believe that regulated access to dark fibre (which is proposed as a remedy in our 2016 BCMR consultation) would have the ability to limit any potential attempts to discriminate over product innovation in mobile backhaul, this will only be the case if all MNOs have opportunities to take up dark fibre.

Given that the MNOs currently have long-term contracts with BTWholesale, which include volume commitments, the effect of these contracts may be to limit the extent of dark fibre MNOs can take up in the short term. This could be particularly concerning if BT were to choose to release EE (or MBNL) from its contractual commitments post-merger.

We should point out that MBNL (Mobile-Broadband Network Limited) is a reference to the joint 50/50 network sharing and investment umbrella company that exists between Three UK and EE, which only last year agreed a new £1bn investment to improve 4G services (here).

In keeping with this Ofcom are also being mindful of the proposed Three UK and O2 merger, which is likely to be much more contentious due to how it would reduce the number of primary Mobile Network Operators (MNO) down to three and only one of those would be independent of a major fixed line network. But that is seen as having little impact on BT’s deal as they weren’t a primary MNO to begin with.

Admittedly Ofcom is not the one making the decision in all this, but as the industry regulator their word will carry significant weight. The fact that they have put no major obstacles in front of the process is likely to make the CMA’s final decision easier. Meanwhile BT has predictably welcomed Ofcom’s submission.