Why the European Commission blocked the O2/Three merger

The European Commission has blocked the proposed acquisition of O2 by Three owner Hutchison to create a single mobile operator.

But why did the Commission come to this decision and how would Three’s acquisition of O2 have impacted the channel?

The Commission has been investigating the proposals since October 2015, and had strong concerns that UK mobile customers would have had less choice and paid higher prices as a result of the takeover. It believed the deal would have ‘harmed innovation in the mobile sector’.

The decision follows research by Ofcom, published in March which suggested that the cost of mobile phone contracts could increase by up to 20 per cent if the merger of O2 and Three went ahead.

The European Commission said in an official statement:

“Today’s decision follows an in-depth investigation by the Commission of the deal, which would have combined Telefónica UK’s "O2" and Hutchison 3G UK’s "Three", creating a new market leader in the UK mobile market.

“The takeover would have removed an important competitor, leaving only two mobile network operators, Vodafone and BT’s Everything Everywhere (EE), to challenge the merged entity. The significantly reduced competition in the market would likely have resulted in higher prices for mobile services in the UK and less choice for consumers than without the deal.

“The takeover would also likely have had a negative impact on quality of service for UK consumers by hampering the development of mobile network infrastructure in the UK. Finally, the takeover would have reduced the number of mobile network operators willing to host other mobile operators on their networks.

“The remedies proposed by Hutchison failed to adequately address the serious concerns raised by the takeover.”

A number of industry experts have given us their thoughts on the European Commission’s decision, detailing why they think the merger was blocked and what’s next for the mobile operators.

Dan Howdle, telecoms expert at mobile, broadband and TV advice site Cable.co.uk, believes the ruling will prevent any future merger attempts by UK network operators.

“When EE was formed from Orange and T-Mobile in 2010 it reduced the number of network operators in the UK from five to four, a number still regarded by Ofcom and the European Commission as able to provide a competitive enough marketplace to ensure reasonable pricing to UK mobile customers,” he explained.

“Unfortunately, research by Ofcom has suggested that a reduction of four network providers to three will potentially send mobile contract prices skyrocketing.

He added: “Likely, this will feel staggeringly unfair to O2 and Three, having watched as Orange and T-Mobile were allowed to do exactly what they are being denied, and then go on to become the dominant force in the UK mobile market. This ruling will almost certainly prevent any future merger attempts by UK network operators."

Kester Mann, principal analyst of Operators at CCS Insight thinks the collapse of the deal will leave both Three and O2 in a precarious position with uncertain futures in the UK.

“It casts serious doubt over the future structure of a European telecoms sector that had banked on the tie-up paving the way to further consolidation,” said Mann.

“The most likely eventual outcome for O2 is sale to private equity, however Liberty Global, which owns Virgin Media, could consider a bid. Sale or partial-sale to a deep-pocketed operator from outside the UK such as Softbank or America Movil is also plausible. For the time being however, O2’s parent Telefonica may elect to hold on to an asset that in recent years has impressively out-performed rivals despite its uncertain future.”

He continued: “Three’s future now looks vulnerable as a sub-scale mobile operator in a market rapidly transitioning to multiplay. A possible option could be to acquire TalkTalk. The broadband and TV provider deploys a similar low-cost strategy and could be available in a cut-price deal having been badly damaged by a recent security breach. Such a deal would not attract major competition concerns and would offer greater scale as well as a position in the rapidly-growing UK multiplay market.”

John Colley of Warwick Business School – a professor of Practice in the Strategy and International Business group and researcher of large takeovers – also gave us his views on the decision, says it comes as little surprise that the EU competition authorities have said enough is enough on the rapid concentration of the UK mobile telecoms sector.

"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,” said Colley.

"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.”

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