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Post written by:

Yves Gassot

Former CEO

For several years now – and not without reason – an idea had taken hold in Europe’s ailing telecoms landscape that consolidation was a mandatory rite of passage for closing the chapter on endless price wars that were incompatible with the massive investments required in fixed and mobile superfast systems.

Hence the largely accepted view that, after the deals that took place in Austria, Ireland and especially Germany, national mobile market competition would be reduced from a four to a three-operator structure. In the wake of these earlier M&A deals, a similar project was announced in France, albeit one that was more complex and which fell through even before it got a chance to be examined by the country’s antitrust authority, while other major deals were quashed in the UK (sale of O2-Telefónica to CK Hutchison) and in Italy (joint-venture between Wind, owned by Vimpelcom, and Tre Italia, owned by CK Hutchison).

O2 turns down the CK Hutchison offer

It came as no surprise, after the series of negative signals from Britain’s Competition and Markets Authority (CMA) and its telecoms regulator, Ofcom, that the European Commission’s DG Competition ultimately nixed the sale of O2.

Telefónica will therefore need to look for other ways to keep its debt-reduction plan on track. Meanwhile, CK Hutchison will find itself in a very tenuous position in the UK, as a small operator that lags well behind the competition. It seems unlikely that it can continue on as is, not least because the situation could attract other potential buyers. There are some from outside the UK which are bold and confident enough (Iliad’s name came up several months back) to believe in their ability to forge themselves a position despite British operators’ slim margins. It seems more likely, however, that in the short or medium term CK Hutchison will find a domestic buyer from amongst veteran wireline telcos such as Sky (No. 2 in the broadband market), Virgin Media (tied for second spot, owned by Liberty Global) or TalkTalk (No. 4), all of which have been shaken by the advent of the heavyweight created by the merger of the country’s largest mobile operator, EE, and its fixed market leader, BT.

When consolidation rhymes with fixed-mobile convergence  

In Europe, national markets’ reduction from four to three mobile operators over the past two to three years is no longer the sector’s only, or even its main, consolidation option. We need to picture the mobile network of the future as an essentially fixed network, with wireless connections in the last 100 metres to service microcells. With this in mind, if a relatively dense fixed infrastructure does not exist, mobile operators’ backhauling costs could go through the roof. We naturally think of Vodafone back when it was a mobile pure player, which kicked off the trend with the successive takeovers of Kabel Deutschland and Ono. But the synergies of a consolidation based on fixed-mobile convergence are not confined to anticipating integrated infrastructure. We also need to factor in the cross-selling synergies enjoyed by a convergent operator, along with those to be had in the use of customer files, amortising retail outlets and in brand management, and possibly investments in video platforms, not to mention the boost to customer loyalty levels amongst quadruple play subscribers. We saw this in France when Iliad entered the mobile market. Telenet’s takeover of mobile operator Base in Belgium, Numericable’s takeover of SFR, Ono’s sale to Vodafone in Spain, or the recent joint-venture between Vodafone and Dutch mobile operators Ziggo, are some examples of this consolidation that rhymes with fixed-mobile convergence.

We should also note that an additional advantage lies, apparently, in competition authorities’ relatively positive attitude towards these mergers, as they continue to draw a distinction between the relevant fixed market and the relevant mobile market – viewing their substitutability as still imperfect at best. But national fixed-mobile consolidation has its limits: in the era of superfast access (once we move outside the ADSL market), the main alternative to the fixed integrated operator is typically the cable operator (most national cable markets are highly concentrated) – even if we must not entirely overlook alternative fibre operators which are typically found only in the largest cities, or fixed DSL operators that are subject to regulation. So there are not that many possible combinations that will enable a market’s four or even three operators to become integrated fixed-mobile operators.

Attitudes towards the Wind – 3 deal could give an indication of the DG Competition’s pull-back

A refusal in Italy after the one in the UK, itself on the heels prohibiting the merger between Telia and Telenor subsidiaries in Denmark, is being seen as a worrying pull-back of the Commission’s policy, and perhaps the end of the sector’s consolidation wave in Europe.

We need to remain prudent, however. The particular details of each M&A deal can justifiably alter national trust authorities’ or the Commission’s views. Without making a prediction on their ultimate ruling which is due before August, it is worth noting several differences between the situation in Italy and the one in the UK:

  • The new O2 would have become the UK’s number one player, ahead of EE and well ahead of Vodafone. In Italy, however, Tre-Wind could continue to trail Telecom Italia by a little and be only slightly larger than Vodafone. An additional indicator is that Wind is significantly outdistanced by both Telecom Italia and Vodafone when it comes to 4G coverage in Italy.
  • The deal in the UK was complicated by pre-existing infrastructure sharing agreements between Three and EE on the one hand, and between O2 and Vodafone on the other.
  • British authorities were very clear about their opposition to the Three – O2 merger, whereas Italian authorities have remained discreet. The upcoming Brexit vote in the UK may have persuaded the Commission not to deviate from British authorities’ (CMA, Ofcom) positions.

And what about structural remedies?

We will add that, in certain cases, the DG Competition’s approval of a merger–acquisition deal is contingent on the parties agreeing to a structural remedy. By this we mean a remedy that requires they divest themselves of frequencies and, when applicable, of a portion of infrastructure such as cell towers, to enable the creation of a new operator and so maintain the “magic” number of four operators. We can also imagine (although this is not the first option) that the entity created by the newly merged Wind and Tre in Italy should have enough spectrum – and little opposition to their sharing their towers – to satisfy a structural remedy imposed by the Commission. We can also continue to speculate by imagining a fixed market player (and MVNO) such as FastWeb (there is no cable in Italy) interested in becoming an MNO, provided its owner, Swisscom, accepts the risks. This fictional analysis is only meant to underscore that, as in the UK, failed mobile market consolidation could open the way to fixed-mobile convergence deals.

Are cross-border deals the ultimate outcome?

In any event, antitrust authorities’ refusal to greenlight mergers will not be able to freeze an unsustainable market structure over the long term. If national market concentration raises legitimate concerns over its impact on retail market prices, there is also a danger of seeing countries and consumers penalised by growing delays in fibre and 4G (and soon 5G) rollouts, once operators have exhausted the margins of their cost-cutting schemes.

So, if national market competition cannot be made more economically efficient by domestic mergers and acquisitions, there may be opportunities for cross-border deals for some. As with fixed-mobile convergence deals, the Commission tends to take a more kindly view of them since they have a less direct impact on the relevant market’s concentration level. Of course, potential synergies are less obvious (the same number of infrastructures are competing) and the inherent risks of the deal will depend on valuation. We can nevertheless believe that, for some operators with ambitious business models, e.g. in their acquisition of TV rights, the drive to achieve critical mass could become a key objective, and one that is vital to their future.