EU Scuppers Three's O2 Takeover Bid

David Murphy

Merger graphic
Three’s £10.3bn takeover of O2 is off after the European Commission blocked Telefonica's sale of O2 to Three’s owner, Hutchison.

The Commission said it has blocked the proposed acquisition under the EU Merger Regulation because of strong concerns that UK mobile customers would have less choice and pay higher prices as a result of the takeover. It also said it was concerned that the deal would have harmed innovation in the mobile sector.

The move is no great surprise after the Commission announced last October that it would be conducting an in-depth investigation into the deal. The Commission said the remedies proposed by Hutchison failed to adequately address the serious concerns raised by the takeover. Hutchison said it is considering a legal challenge to the decision.

Commissioner Margrethe Vestager, in charge of competition policy, said: "We want the mobile telecoms sector to be competitive, so that consumers can enjoy innovative mobile services at fair prices and high network quality. The goal of EU merger control is to ensure that tie-ups do not weaken competition at the expense of consumers and businesses.

“Allowing Hutchison to takeover O2 at the terms they proposed would have been bad for UK consumers and bad for the UK mobile sector. We had strong concerns that consumers would have had less choice finding a mobile package that suits their needs and paid more than without the deal. It would also have hampered innovation and the development of network infrastructure in the UK, which is a serious concern especially for fast moving markets. The remedies offered by Hutchison were not sufficient to prevent this."

John Colley, Professor of Practice in the Strategy and International Business Group at Warwick Business School, who researches large takeovers, said the Commission’s move should surprise no-one. "Following the merger of T-Mobile with Orange, subsequently purchased by BT, the industry was reduced to four players. The proposed merger of Three with O2 would have made it three players and the evidence from markets elsewhere shows that three players results in higher prices for consumers compared to four. In effect competition reduces and the consumer pays the price for that,” he said.

"It is clear that the merger would have substantially reduced costs in requiring less shops, marketing, administration, head offices, and there would have been benefits in terms of reduced network operating costs. However, the reduced competition would have meant that Three/O2 would not have to pass those savings on to the consumer."

The analyst, Ovum, said that despite the decision, maintaining the status quo is not an option for either Three or O2. “Neither Three nor O2 can stay as they are,” said Ovum practice leader, Matthew Howett. “First, their relative size in the UK market is too small, not only in terms of subscriber basis, but also with regard to their spectrum holdings. Second, the UK mobile market is set to become more competitive, not only because a combined BT/EE is a much stronger player, but also because Sky is set to enter the mobile market with force and TalkTalk and Virgin will be relaunching their services and introducing 4G services. Third, the UK fixed, mobile, and TV markets are increasingly interdependent, and existing as a mobile-only operator will become tougher still. Finally, Three is set to lose its unique customer proposition of free roaming because this will become available to all UK consumers from mid-2017 under the EU roaming regulation.

“Further mergers will likely have to play out. Telefonica wants to sell O2; Three has an appetite to grow. Other players in the market have declared their interest in merging. Virgin Media and TalkTalk are among them, and the next wave of M&A talks will likely include them in dealing with either Three or O2. As to what combination will prevail, it is still uncertain and will largely depend on the financial structure of the deal. One thing is certain: no combination will rebalance the mobile market in the same way that allowing Three and O2 to merge would have achieved.”