Mobile services

EC to Stop Hutchison Buying Telefónica UK – Report

European Union regulatory authorities will tomorrow block Hutchison Whampoa's proposed £10.25 billion ($15 billion) takeover of Telefónica's UK business, according to a report from the Wall Street Journal (WSJ).

Two sources familiar with the matter have told the WSJ that Hutchison Whampoa Ltd. (Hong Kong: 0013; Pink Sheets: HUWHY) has failed to address concern within the European Commission (EC) that a deal would lead to higher prices and less choice for consumers in the UK telecom market.

The Hong Kong player hopes to merge Telefónica UK Ltd. , which trades under the O2 brand, with Three UK , a mobile network operator (MNO) it already owns.

While O2 is currently the second largest of the country's four nationwide MNOs, and 3 the smallest, a merger of the two players would produce a new market leader and leave the country with just three infrastructure-based service providers in total.

EE , the current market leader, was acquired by fixed-line incumbent BT Group plc (NYSE: BT; London: BTA) earlier this year in a £12.5 billion ($18.3 billion) deal, leaving Vodafone UK as the other network operator.

Hutchison has offered to make a number of concessions to get the deal approved, including selling space on the combined network to mobile virtual network operators such as pay-TV giant Sky . (See Hutchison Offers Major Concessions to Seal 3/O2 Deal.)

Despite its efforts, competition authorities in the UK have continued to speak out against the deal, arguing it would damage competitiveness in the UK telecom sector. (See Eurobites: Merger of O2 & 3 Is a Bad Idea, UK Tells EC, Eurobites: O2 & 3 May Not Become One and Orange & Hutch: A Tale of Two Takeovers.)

The European Commission, meanwhile, has recently taken a dim view of in-country mobile consolidation in the region: Its apparent opposition to a merger between Telenor Group (Nasdaq: TELN) and Telia Company (formerly TeliaSonera) in Denmark ultimately prompted those players to abandon their plans.

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Even so, several analysts have argued in favor of a deal, with Northstream 's Bengt Nordström saying that blocking it will send a negative signal to the investment community.

In Nordström's view, a tie-up between 3 and O2 would provide a counterweight to BT, which now towers over rivals in the fixed and mobile markets following its EE takeover. The Northstream CEO believes regulatory opposition to Hutchison's move will lead to cost cutting, outsourcing and less investment in future.

Spain's Telefónica was last month reported to be considering fresh options for the disposal of O2, including selling the business to a private equity company or Liberty Global Inc. (Nasdaq: LBTY), the owner of UK cable operator Virgin Media Inc. (Nasdaq: VMED). (See Telefónica Eyes Alternative Buyers for UK Biz – Report.)

Telefónica sees the deal largely as a means of reducing net debts, which had ballooned to nearly three times its annual operating income (before depreciation and amortization) in December -- way in excess of its target ratio of 2.35.

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

iainmorris 5/4/2016 | 12:08:31 PM
Still not blocked It's late Wednesday in Europe and there has been no update from the EC, so we'll have to wait. The signs do suggest the deal will get blocked, though, with the UK's Telegraph newspaper reporting this will happen at a meeting next week: http://www.telegraph.co.uk/business/2016/05/03/uk-mobile-market-like-venezuela-says-o2-chief/ 

Just following up on previous comments, my sense is that European regulatory authorities are genuinely not convinced by operator arguments that consolidation is needed to support investment and that investments will take a hit unless it happens. There are those who would see a player like 3 in the UK, or Iliad in France, as a highly disruptive challenger that is putting pressure on the bigger players to up their game and pump money into higher-speed networks. Should 3 merge with O2, the UK telecom market would lack that maverick player. You could easily draw a parallel with T-Mobile US in the States, which has clearly spurred its bigger rivals to keep innovating.  
alanbreznick 5/3/2016 | 11:30:37 AM
Re: Constant push-pull Same in the US too, right? The FCC keeps stopping the number of wireless players from narrowing down from 4 to 3. How long can regulators keep up the good fight?
Alison_ Diana 5/3/2016 | 10:04:03 AM
A Global Trend? Interesting to see the EC prevent this deal, especially in light of similar moves in the US against other prospective acquisition/merger targets in different industries. Is this part of a crackdown to prevent more behemoth companies, including service providers? Will there be any spin-off impact on smaller acquisition targets? And did the EC decision have anything to do with taxes, as we've seen in some of the US-based mergers and acquisitions where US-based companies wooed European businesses, planning to move their headquarters abroad primarily for preferential tax purposes.
msilbey 5/3/2016 | 10:02:16 AM
Constant push-pull As someone (I can't remember who) pointed out recently, there's a natural monopolistic tendency in capital-intensive industries like the mobile carrier market. It seems like the wireless companies will always be pushing to consolidate, while regulators will always work to preserve a greater number of choices. 
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