Telecoms firms wary of Commission’s hard line on mergers

The Commission is looking into telecoms mergers in Ireland and Germany, but the industry is worried about losing out to global rivals

The senior managers of Europe’s largest telecoms companies are engaged in a fierce struggle with the European Commission. They already disapprove of proposals from Neelie Kroes for a ‘Connected Continent’ that she says would create a single European Union telecoms market.

The likes of Stéphane Richard of France Télécom and Vittorio Colao of Vodafone have pressed Joaquín Almunia, the European commissioner for competition, to relax the European Union’s merger control rules. They argue that they must be cut some slack if their companies are to stand a chance of growing sufficiently to compete internationally.

Research commissioned by the European Telecommunications Network Operators’ Association, which represents national incumbents such as Deutsche Telekom and Telecom Italia, took a similar line last year. A study by the Boston Consulting Group found that the “mobile sector in Europe is characterized by a high degree of fragmentation” and consumers could benefit from the Commission adopting a more “dynamic and holistic approach” to merger review.

Those telecoms chiefs were very disappointed when Almunia extracted far-reaching concessions from Hutchison Whampoa, owner of the 3 brand, as the price for his consent to its €1.3 billion bid for Orange Austria in December 2012.

Now two new telecom mergers are under consideration by the Commission, and incumbent operators are hoping that Almunia may have had a change of heart. Under review are Hutchison’s €780 million bid for Telefónica Ireland, marketed as O2 Ireland, and Telefónica’s €8.6bn bid for E-Plus, a German subsidiary of the Dutch KPN group.

Joining forces

The Commission decided in November to open an in-depth investigation into the Irish deal, and must decide by 20 December whether to open a similar inquiry into the German plan. Both deals bear similarities to the Austrian merger: the number three and number four on a national market are seeking to join forces.

The merged entity in Ireland would have a 37.5% share of the Irish mobile market, making it the second largest operator by revenue, while in Germany the proposed joint company would have 32% and be the third largest player.

Neither merger will lead to one dominant operator. If they raise prices too high, mobile virtual network operators (MVNOs) – which do not own a network but rent spectrum – might enter the market.

However, the Commission is not convinced that MVNOs can constrain the current operators. Nor does Almunia appear to buy the industry’s arguments on the need for scale. “As long as markets remain fragmented along national borders, there is no evidence that operators will invest more if they scale up,” he said early in 2013. “The industry would do well to consolidate across national borders” as opposed to within national markets, he added.

While the Irish merger will probably be approved, because Hutchison as a market challenger is likely to keep its prices down after the merger, it will be “very difficult” to secure approval for Telefónica, says Antonios Drossos of telecoms consultant Rewheel.

The Spanish incumbent is unlikely to accept remedies on the scale sought by the Commission, he suggested. In which case, Europe’s frustrated telecoms executives will be looking for other ways to grow.

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