On 11 May 2016, the European Commission ("Commission") prohibited the proposed acquisition of Telefónica's O2 by Hutchison's Three under the EU Merger Regulation.  The Commission's primary concern was that a combined Three/O2 would have the ability and incentive to raise prices in the UK market for mobile telecom services.

The Commission was concerned that a 'four to three' deal would lead to reduced choice and quality for customers, hamper the future development of UK mobile network infrastructure, and reduce the number of mobile network operators ("MNOs") effectively willing to host mobile virtual network operators ("MVNOs").  MVNOs do not own the networks they use to provide mobile services but instead agree with MNOs to access their network at wholesale rates.  Further concerns arose as the four UK MNOs have already agreed to share their network infrastructure – O2 with Vodafone, and Three with EE.  As a result, the merger would enable the combined Three/O2 to hamper its rivals' plans to improve those shared networks by, for example, making it more expensive for one rival to expand or frustrating investments by the other.  Lastly, the parties argued that UK customers would benefit from the deal based on the integration of the Three and O2 networks.  However, the Commission regarded the claimed efficiencies as uncertain to materialise and likely to do so, if at all, only a few years after the merger. 

Three/O2 is the 25th Commission prohibition in 26 years of EU merger control practice.  It is also the first mobile telecom merger blocked under the EU Merger Regulation and in sharp contrast to recent cases involving mobile telecom consolidations.  While Commissioner Almunia was in office, the Commission conditionally approved 'four to three' mobile telecom deals in Austria (see VBB on Competition Law, Volume 2013, No.1, available at www.vbb.com), Ireland (see VBB on Competition Law, Volume 2014, No.6, available at www.vbb.com), and Germany (see VBB on Competition Law, Volume 2014, No.7, available at www.vbb.com).  However, since Commissioner Vestager came to office in November 2014, the preference for conditional clearance of 'four to three' mobile telecom deals has shifted.  For example, the Commission acknowledged it had been "on the road" to prohibit the Telenor/TeliaSonera merger in Denmark before it was abandoned prior to a formal decision in September 2015 (see VBB on Competition Law, Volume 2015, No.9, available at www.vbb.com). 

Of course, each merger analysis is fact-specific and there is no "magic number" that either three or four MNOs must be retained for a competitive telecom market.  The message from the Commission is that competition, not consolidation, has promoted investment in mobile network infrastructure.  Nonetheless, Three/O2 represents an important policy turning point.  Currently, the Commission is carrying out an in-depth investigation into another 'four to three' mobile telecom deal: the Three/WIND joint venture in Italy.  A decision is expected in August 2016 and it will be interesting to see how the new approach will apply.

The Hutchison/Telefónica case also illustrates the close working relationship between the UK's Competition and Markets Authority ("CMA") and the Commission.  The CMA originally sought a referral of the Three/O2 transaction to the UK, under Article 9(2) of the EU Merger Regulation.  Despite the Commission refusing its request, the CMA later noted that it enjoyed 'extensive, constructive engagement' during the investigation.  Later, the CMA argued in an open letter that the parties' proposed remedies were 'materially deficient' and concluded that absent comprehensive structural remedies – such as the divestment of the entire Three or O2 mobile network businesses – the only option available was prohibition.  Ultimately, the Commission agreed.

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