Deutsche Telekom's efforts to merge its Dutch business with local mobile rival Tele2 ran into problems Thursday after the European Commission (EC) complained that a tie-up would lead to a reduction in competition and potentially mean higher prices for Dutch consumers. (See Eurobites: EU Probes Dutch T-Mobile/Tele2 Deal and T-Mobile Netherlands to Merge With Tele2.)
While the EC has not yet moved to block the deal, it has sent a statement of objections to the two operators, which have argued that a merger of their operations will create a more "sustainable" third player to compete against market leaders KPN Telecom NV (NYSE: KPN) and VodafoneZiggo.
Resistance from European regulatory authorities is hardly surprising given their previous opposition to merger activity in the mobile sector. But it will further trouble industry executives who insist the region's overly competitive telecom markets leave Europe at a disadvantage to the US and Asia in the race to build next-generation networks.
However, some precedent for mobile consolidation may offer hope to the operators that a solution can be found. In Germany, mobile operators Telefónica Deutschland GmbH and E-Plus Service GmbH & Co. KG were allowed to merge after agreeing to sell network capacity to other players. Italian service providers 3 Italia and Wind Telecomunicazioni SpA also received the green light when they made similar concessions.
Rather than offer any such concessions at this stage, Deutsche Telekom AG (NYSE: DT) is criticizing the EC's logic. In a statement published on its website, the German incumbent said the merger would bring together two small players with a combined market share of just 25% of the mobile sector. It also pointed out that recent competition has been driven by mobile discounts offered by KPN and VodafoneZiggo.
Deutsche Telekom went on to say the merger was not a "traditional four-to-three merger, since Tele2 is to a large extent dependent on the network of T-Mobile Netherlands [its Dutch brand] to offer its mobile services."
It further complained that KPN and VodafoneZiggo are "currently unchallenged in their ability to raise fixed broadband prices in the Dutch market."
Deutsche Telekom is applying the same argument it has used to justify the proposed merger of its T-Mobile US Inc. business with Sprint Corp. (NYSE: S) -- a deal that would similarly unite the number three and four players in the US -- insisting the companies will be able to build a 5G network much faster if they are joined together. (See T-Mobile & Sprint: Marriage made in hell.)
That promise comes amid industry and government concern that Europe is lagging behind other parts of the world in the development of 5G technology. That lag could pose a threat to the region's economic prospects, say critics.
Deutsche Telekom is presenting its Dutch merger plans as an opportunity for the EC to prove it is not "fixated" on having four mobile operators per national market.
"Europe has been falling behind the US and Asian telco markets for years resulting in a massive drain of capital," it says. "The sector trades at ten-year lows as a consequence of rising investment needs for next-generation communication networks, without corresponding opportunities to earn a fair return."
The German operator is clearly desperate to execute a merger. It has stopped reporting results from T-Mobile Netherlands with the rest of its European operations, instead shunting the business into its GHS (Group Headquarters and Shared Services) division, and in the recent second quarter Dutch sales were down 7.8%, to €318 million ($371 million), compared with the year-earlier quarter. Earnings (before interest, tax, depreciation and amortization) fell 8.4% over the same period, to €109 million ($127 million).
In today's statement, Deutsche Telekom said it would enter into a "constructive dialogue" with the EC and remained confident of securing its approval by the end of the year.
— Iain Morris, International Editor, Light Reading