Wave of European Telecom M&A Raises Competition, Investment, Regulatory Issues

A wave of mergers and acquisitions in the European telecom market is raising concerns about competition and service prices, analysts, regulators and attorneys said. Questions include how many mobile operators are needed for a competitive national market; whether M&A is necessary to spur investment; and whether European Commission antitrust decisions are undermining national regulators, they said. Some see the EC as moving to crack down on M&A through conditions, possibly benefiting consumers by averting price increases that consolidation often brings. Others contend deals eventually benefit customers by boosting companies' network investments.

Global telecom M&A had some resurgence in 2014 and 2015, analysts said. M&A activity rose last year amid Hutchison Whampoa's takeover of O2 Ireland in May 2014, Ovum analyst Mai Barakat said July 22. The U.K. was "the anchor of European deal making" in the first half of this year due to the $15.3 billion takeover proposal by Hutchison Whampoa, which owns mobile operator Three, of Telefónica UK's O2, Mergermarket said in a report. And in February, BT proposed to buy EE, owned by Orange and Deutsche Telecom (DT), for 12.5 billion pounds ($19.5 billion). The companies are, respectively, the largest suppliers of fixed communications services and mobile communications services in the U.K., the Competition and Markets Authority (CMA), which will investigate the takeover, said in July. O2/Three is relevant to the inquiry because the mobile operators are major players in the U.K., the CMA said. That acquisition, which would join two of the four mobile network operators (MNOs), falls within the jurisdiction of EU merger control rules and is being handled by the European Commission, it said.

The EC is investigating Denmark's TeliaSonera's planned combination with Telenor. The EC said it's concerned that the combined entity would "face insufficient competitive constraints from the only two remaining players" in the country, leading to higher prices and less innovation. A decision is due Wednesday. Earlier this year, the EC OK'd the 7.4-billion-euro acquisition by multinational cable and telecom company Altice of PT Portugal, subject to divesting Altice's Portuguese businesses. In the U.S., Altice is buying control of cable operator Suddenlink (see 1507220074). And the EC let Orange buy Jazztel in a 3.4-billion-euro deal subject to Jazztel divesting an independent fiber-to-the-home network.

Europe's communications market has had "two distinct waves of consolidation," Cable Europe Managing Director Caroline van Weede said. In the first, cable operators in markets dominated by incumbent telcos with national networks joined together to challenge and compete, she said. Cable, nevertheless, remains fragmented, especially in Germany and Eastern Europe markets, she said.

The second wave of M&A began with the "marriage of cable and mobile networks," van Weede said. It started with mobile operators acquiring domestic cable operators in Finland, Germany, Portugal and Spain, and shifted gear when France's Numericable cable network bought mobile operator SFR and Belgium's Telenet acquired Belgian wireless carrier Base, she said. Base since was bought by U.S.-based Liberty Global, whose chairman is John Malone, who through his Liberty Media is backing Charter Communications' planned takeover of Time Warner Cable and Bright House Networks.

Higher Prices?

The U.K. Office of Communications recently saw two broad types of mobile consolidation, some in national markets and others across different international markets, it said in a July discussion paper on its strategic review of digital communications. Examples of fixed/mobile consolidation include Liberty Global/Base, Ofcom said. There is also horizontal mobile consolidation, including Three/O2 Ireland and O2/E-Plus in Germany, both of which cut the number of mobile wholesale network operators from four to three, it said. BT/EE would establish a converged player with significant fixed and mobile network infrastructures, while Three/O2 could create a more concentrated mobile market, it said.

Consumers are likely to get better services at lower prices if there are a "reasonable number of effective competitors," Ofcom said. It defined reasonable as having at least four credible national wholesalers of mobile services but said its approach is being challenged by the recent wave of four-to-three mobile mergers in Europe. Austrian and Irish M&A produced evidence of some significant price increases, Ofcom said. Three Ireland recently hiked prices for its Bill Pay SIM-only customers 25 percent, and the Austrian telecom regulator found that user prices rose more than 30 percent between late 2013 and the end of 2014, it said.

"Price is a critical parameter of competition," Competition Commissioner Margrethe Vestager said June 15. The EC will continue to analyze likely price effects in its enforcement work, but will also examine what happens to innovation, she said. The EC seeks bids for a study on competition and market outcomes in the telecom sector.

Boosting Investment?

"The focus of future policies has to shift towards the promotion of innovation and investment in network infrastructure," European Telecommunications Network Operators' Association Chairman Steven Tas said at a February workshop of the Body of European Regulators of Electronic Communications. "Less fragmented and more efficient markets will drive better value for consumers and will help bridge Europe's investment gap." A 2013 study for ETNO said more M&A in the highly fragmented mobile sector could "benefit the consumer," considering not just short-term price ramifications but also the longer-term value of additional investment. Some disagree.

"There is no evidence that massively large operators invest more or become more profitable" from consolidation, European Competitive Telecommunications Association Director Erzsébet Fitori said. Large-scale consolidation driven by regulatory policy that forces viable competitors to disappear would make a lot of existing investment redundant, she said. "Europe needs small and agile Davids, who have better ideas, invest more efficiently than yesterday's Goliaths and innovate to genuinely deliver what end-users want." There might not be a magical number of operators, she emailed, "but 2 is definitely not enough!"

Vestager said she has seen no evidence that incumbents will be able to invest more if they're allowed to combine with rivals in the same country. She said June 15 that there's ample evidence that excessive consolidation may lead to less competition and higher bills for consumers and to lower incentives to innovate.

EC Shift Seen

Another major issue in European M&A is the growing debate over whether certain transactions should be vetted by the EC or national competition authorities. If each of the firms involved derives more than two-thirds of its EU-wide revenue within the same member country, rules say there's no EU dimension, said Antonios Drossos, managing partner of Finnish telecom consultancy Rewheel. BT/EE is subject to national review, he said. There's a referral mechanism by which a national competition authority can ask the EC to send a case back, but there's no recourse if the EC refuses, he said.

It's an "obvious paradox," Drossos said. The EC argues that M&A mostly affects national markets, while operators want to define the telecom market as international, he said. EC transaction decisions narrowing the number of mobile operators from four to three are not popular with national authorities, he said. Despite that, national regulators, even those publicly opposed to EC decisions (such as German competition authority Bundeskartellamt) haven't challenged them in the European Court of Justice, Drossos said. That would be a politically "toxic development" given EC close cooperation with national competition authorities, he said. Before it arrives at an antitrust decision, the EC meets with all 28 national regulators, who take a nonbinding vote, he said. In the Austrian and Irish cases, a minority of EU governments opposed the EC; in the German E-Plus/O2, only two nations backed the EC, he said.

Vestager has hinted she will deviate from the approach of her predecessor, Joaquín Almunia, Drossos said. Almunia's model in approving M&A was to try to dress up mobile virtual network operators to work as MNOs, but that didn't work, he said. Vestager indicated she'll be tougher on telecom M&A by making clear that price increases must be avoided, Drossos said. In her first telecom decision, Spain's Jazztel/Orange, Vestager mandated a new fourth infrastructure player buy a divested fiber network in Spain's five largest cities and offer national services by securing wholesale access to Jazztel's national ADSL network, he said. If the EC does the equivalent in mobile deals, that points to it saying there must be four national mobile operators, he said. Vestager's recent comments on mobile M&A signaled a "distinct possibility" that the EU might block one or more pending combinations, Brussels telecom lawyer David Cantor said.

These deals are national, but DT's pending acquisition of a substantial minority of BT as a consequence of BT's planned purchase of EE "could have a tectonic impact on cross-border consolidation in the European telco space," Cantor said. But "we first need to see the upshot of" the BT/EE and Three/O2 reviews, he said. "I can't think of another instance wherein two factually interrelated merger cases were subject to simultaneous review at (respectively) national and EU level," he emailed.

But Baker & McKenzie M&A attorney Peter Strivens predicted continued national consolidation of mobile operators trapped in the low-value end of the market that provide telephony services but not content. There may also be a trend toward more network- and cost-sharing, which doesn't involve M&A but rather sales and purchases of "large estates of masts," or holdings of mobile phone towers, Strivens said.