The European Commission (EC) officially blocked CK Hutchison’s proposed £10.5 billion acquisition of O2 UK, citing “strong concerns” over the deal’s impact to UK customers, and a potential harm to “innovation in the mobile sector”.
The decision follows an in-depth investigation of the deal by the EC, which would have seen a tie-up of Telefonica’s O2 and Hutchison’s Three operations, creating a new market leader in the country.
Antitrust regulators were widely expected to block the deal, so the news hardly comes as a surprise, despite a number of proposed concessions offered from CK Hutchison, “which failed to adequetly address the serious concerns raised by the takeover,” said the EC. Some of the operator’s most high profile executives have also been lobbying in recent months to push the deal through, but to no avail.
In a statement released this morning, the EC said the takeover would have removed an “important competitor” in the UK, leaving only Vodafone and EE, recently acquired by BT, to challenge the merged entity.
In addition, the tie-up would “likely have resulted in higher prices” for mobile services in the UK, while lessening choices for the consumer, and the Commission continued there would have also likely been a negative impact on quality of service for UK consumers, and “hampering the development of mobile network infrastructure in the UK”.
EC commissioner Margrethe Vestager, who has a growing reputation for taking a hard line on mergers that reduce competition, said the proposed deal “would have been bad for UK consumers and bad for the UK mobile sector”.
“The goal of EU merger control is to ensure that tie-ups do not weaken competition at the expense of consumers and businesses…. We had strong concerns that consumers would have had less choice in finding a mobile package that suits their needs and paid more than without the deal.”
The deal would have also “reduced the number of mobile operators effectively willing to host virtual operators”, added the statement, leaving existing mobile virtual operators in a weaker position to negotiate position to obtain favourable wholesale access terms.
Hutch could launch legal challenge
In response, Hutchison said it was “deeply disappointed” by the decision to the deal, which was struck more than a year ago, adding that it will study the verdict in detail, “and will be considering our options, including the possibility of a legal challenge”.
“We strongly believe the merger would have brought major benefits to the UK,” it added.
The company said it will now focus on working with the commission on gaining clearance for its proposed merger of Wind and 3 Italy.
In the end, EC said Hutchison’s proposed remedies “did not resolve the structural problems created by the disruption to the current network sharing agreements in the UK”, and were not sufficient to replace weakened competition in both the retail and wholesale mobile markets.
Hutchison had said it would give access to a share of the merged entity’s network capacity to one or two mobile virtual operators, it would divest O2’s existing stake in the Tesco mobile joint venture, as well a strike a wholesale agreement to share network capacity with Virgin Media.
For Telefonica, it leaves the company potentially searching for another buyer for its UK unit, and it may not have to look very far, with acquisitive cable group Liberty Global revealing this week it would consider a move for the unit.
Speaking on an investor call, Liberty CEO Mike Fries said “it would be strange if we didn’t evaluate that option”, when asked if the company would bid for O2 UK, should the deal with Hutchison meet its expected end.
“We look at all options in the marketplace,” he added.
The company currently provides mobile services in the UK through Virgin Media, with it renting capacity on EE’s network, as part of a contract until 2018.
EE, of course, is now owned by BT, which rivals Virgin Media in the internet and TV space.