Putting M&A Hopes on Hold in Europe
Telecom mergers will remain the exception rather than the rule
Another week, another obstacle to European telecom-sector consolidation. Companies that still harbor deal-making ambitions will need to think outside the national or sector box.
On Monday, Britain’s antitrust watchdog published an open letter to colleagues in the European Commission. This laid out the full extent of its opposition to a merger between CK Hutchison’s Three network and Telefónica’s U.K. arm O2. The commission is due to rule on the deal May 19, after a six-month investigation.
Hutchison has sought to allay the competition concerns of the commission’s hawkish boss, Margrethe Vestager, by offering concessions or “remedies.” These include making parts of its network permanently available to Sky, which plans to launch a mobile service later this year, and Liberty Global’s Virgin Mobile unit, which currently uses the EE network now owned by BT Group.
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But the U.K. antitrust watchdog, like the country’s telecom regulator, is against any deal that reduces the number of network owners from four to three. This rules out anything that CK Hutchison has offered or might want to offer.
The commission has the final word. But it may be politically difficult for Brussels to overrule both London regulators—particularly a few weeks before Britain votes on whether or not to stay in the European Union.
The market reacted with barely a shrug, reflecting that investors already feared the worst.
And the issue isn’t confined to the U.K. Hopes of consolidation in the French market have also been thwarted this month, though not by regulators. Orange, the network controlled by the French state, and smaller rival Bouygues Telecom failed to agree on terms of a much-discussed merger that would have reduced the number of French operators from four to three. Bouygues wanted a larger stake in Orange than the French state was willing to cede.
Even in the U.S., such consolidation has proven difficult. Regulators signaled they would block a merger of Sprint and Deutsche Telekom’s T-Mobile US. That in turn has put considerable margin pressure on all wireless companies as T-Mobile has spurred a fierce price battle.
In Europe, companies now need to think beyond intra-national combinations. Moving into neighboring services looks fair game after the U.K. antitrust body cleared the merger of BT Group’s fixed-line network and mobile operator EE earlier this year without remedies. The major prize here remains the merger of Vodafone with Liberty Global’s European cable assets.
Moving into neighboring countries is the final frontier. Telecom Italia is the obvious target as the weakest of Western Europe’s former state monopolies and with a dominant French shareholder in the form of media group Vivendi.
But the Orange-Bouygues saga shows how attached some European states remain to fostering national champions. Political talk of broadband as a strategic priority suggests this won’t change.
Investors hoping consolidation will reduce competition pressures won’t get relief: European telecom mergers will remain the exception rather than the rule.