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.
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.
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, , News Editor, Light Reading