UK Needs O2/3 to Challenge BT/EE – Analyst

UK regulators should approve the mobile merger between O2 and 3 to create a counterweight to a combined BT and EE, according to Bengt Nordström, the CEO of consulting and market research player Northstream.

Earlier this week, fixed-line incumbent BT Group plc (NYSE: BT; London: BTA) secured regulatory approval for its £12.5 billion ($19.2 billion) takeover of EE , the UK's biggest mobile operator, without having to relinquish spectrum holdings or make any other concessions. (See Eurobites: BT-EE Deal Clears Another Hurdle and BT Locks Down £12.5B EE Takeover Deal.)

But authorities have yet to reach a decision on a separate £10.25 billion ($15.7 billion) deal between Hutchison Whampoa Ltd. (Hong Kong: 0013; Pink Sheets: HUWHY) and Telefónica that would produce the UK's biggest mobile operator by customer numbers. (See Telefónica Seals $15.2B O2 Sale to Hutchison.)

Hutchison Whampoa wants to merge Telefónica UK Ltd. , whose O2 brand is the UK's second-biggest mobile service provider, with its existing Three UK business, the smallest of the country's four mobile network players.

Such a move, however, would leave the UK with just three mobile networks and has prompted hand-wringing among competition authorities concerned about the impact on consumer welfare.

Yet having given the green light to BT and EE, authorities could actually deal a blow to competition if they stopped 3 and O2 from tying the knot, according to Nordström.

"When they approved BT/EE they created a very big operator and therefore it would make sense to allow 3 and O2 to level the playing field," he tells Light Reading.

Nevertheless, the prospects for a merger look uncertain after Sharon White, the boss of UK regulator Ofcom , was reported earlier this month to have noted the risks to consumers posed by a reduction in the number of mobile operators in the market. (See Eurobites: Ofcom Sounds Alarm on O2 Deal.)

What's more, the European Commission (EC) has adopted a hardline stance on the issue of in-country consolidation: Its recent opposition to a merger between Telenor Group (Nasdaq: TELN) and Telia Company in Denmark eventually led the two operators to abandon their plans.

Troublingly, the EC earlier today launched a fresh investigation into the deal between Hutchison and Telefónica, expressing concern that a merger would lead to a rise in prices, a worsening of conditions for mobile virtual network operators and even collusion between network players.

"With this investigation we want to ensure that consumers in the UK do not pay higher prices or face less choice as a result of this proposed takeover," said Magrethe Vestager, the EC's competition commissioner, in a statement.

As far as Nordström is concerned, regulators are being shortsighted if they believe that blocking mergers is in the interests of the market.

"It's quite simple -- when you talk to the number three and four players in the market, they don't see a viable business going forwards," he says. "The signals from Ofcom and the European Commission demonstrate an ignorance about how investors will react -- they are scaring away investors and that is counterproductive."

Nordström says that blocking the merger between 3 and O2 would only lead to cost cutting, outsourcing and less investment in future.

For all the latest news from the wireless networking and services sector, check out our dedicated mobile content channel here on Light Reading.

Even if the companies were allowed to merge, however, the new-look business might find itself under pressure to develop a fixed-line capability or risk losing customers to quad-play packages -- comprising bundles of fixed voice, broadband, mobile and TV services -- from BT and EE.

"Ultimately they would need to focus on getting fiber to customers, entering enterprise markets and looking at how they can have a media play," says Nordström. "The same reality exists for them but the O2 acquisition would give them time."

Executives at 3 have previously downplayed the appeal of converged services but might quickly change their minds if the merger between BT and EE starts to have an impact.

Reporting financial results earlier this week, BT CEO Gavin Patterson indicated that BT might look to provide TV sports content to EE customers following the tie-up, while EE CEO Olaf Swantee has also talked up the potential of service offerings that make use of both fixed and mobile technologies. (See BT May Offer Sports on EE Devices – CEO.)

Number-two mobile operator Vodafone UK is also alert to the quad-play threat set to come from BT and EE.

The company is planning on introducing a TV offer later this year, but the broadband service it launched in the summer relies on the use of BT's infrastructure. (See Vodafone UK Enters Quad-Play Fray.)

Ofcom might see the "structural separation" of BT -- splitting its Openreach access networks business from the rest of the company -- as an alternative means of fostering a more competitive telecom market, although such a radical move could potentially backfire. (See Ofcom Does Not Rule Out BT Carve-Up.)

BT's critics argue that conditions would be fairer if the incumbent were not allowed to own the network on which it provides retail services, but BT has threatened to withhold investments it is making in higher-speed services if regulation proves unfavorable. (See BT Outlines Conditional Gigabit Vision for UK.)

Others will be unhappy that competition authorities have not even forced BT and EE to give up spectrum licenses as a condition of allowing them to merge.

EE already enjoys a huge spectrum advantage over its rivals and will be able to make use of additional 2.6GHz spectrum that BT acquired during the UK's 4G auction once the merger has been finalized.

Speaking at the recent Broadband World Forum in London, Tom Mockridge, the CEO of cable operator Virgin Media Inc. (Nasdaq: VMED), complained that BT and EE would control about two thirds of the best spectrum in the UK market following their tie-up. (See Virgin Media Boss Attacks BT/EE Deal.)

"It would leave too much spectrum in the hands of one company and would not be a good outcome," he said.

— Iain Morris, Circle me on Google+ Follow me on TwitterVisit my LinkedIn profile, News Editor, Light Reading

COMMENTS Add Comment
mendyk 10/30/2015 | 12:08:15 PM
Simple arithmetic Regulators will continue to regulate on the assumption that more is better when it comes to competitors, despite ample evidence that in the mobile sector there's basically room for three primary providers. Using regulatory powers to prevent the market from getting to that state only guarantees a de facto duopoly, as the smaller competitors battle one another for leftover market share.
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