Out-Law News 3 min. read

Telecoms consolidation necessary for infrastructure investment, says expert

The European Commission must allow some consolidation to take place in the EU telecoms market if it wants to support investment in next-generation telecoms infrastructure, an expert has said.

Corporate lawyer Frédéric Ichay of Pinsent Masons, the law firm behind Out-Law.com, who specialises in technology sector M&A deals, said the Commission will put at risk that investment if it applies its merger control rules too strictly when assessing proposed deals in the telecoms market.

"There is a lot of investment needed in new telecoms infrastructure and R&D to support global economic growth. This is something that has been recognised by the European Commission in its vision for a digital single market across the EU. It has called on telecoms companies to invest in the infrastructure necessary to support online trade and the wider digital economy, for example through the development of faster broadband services."

"However, telecoms operators face a squeeze on their revenues from a number of different directions, from the rise of 'over the top' services like Skype and WhatsApp and the impact that has had on the popularity of text messaging, to moves to end roaming charges, for example. Telecoms companies therefore argue that to be achieve the scale, efficiencies and cost savings they need to invest in new telecoms infrastructure, they need to be able to merge with other businesses in the market," he said.

"Whilst consolidation is a global trend in the telecoms sector, in Europe the merger control regime is quite strict; much stricter than in Asia for example. The Commission is keen that telecoms markets within the EU are not dominated by just two or three big operators for fear of the impact that might have on consumer choice, price of services and innovation. However, in assessing proposed telecoms mergers, the Commission must be careful that restrictions they impose do not discourage the investment they want to see in next-generation infrastructure," he said.

Ichay was commenting after Danish telecoms businesses Telenor and TeliaSonera stepped back from their proposed merger after failing to agree with the Commission a way for them to address concerns the Commission had about the potential impact on competition in the Danish market as a result of the deal. The Commission, responsible for assessing major M&A deals in the EU, had opened an investigation into the proposed deal in April.

In a statement the companies said that the deal they had planned would have created a mobile operator "with the scale and ability to compete and invest would ensure that customers and businesses would benefit from better quality, speed and coverage". However, it said that its discussions on the merger with the Commission had "now reached a point where it is no longer possible to gain approval for the proposed transaction".

In response, the Commission defended its approach and confirmed that the companies had not been able to "fully address" its "competition concerns".

EU competition commissioner Margrethe Vestager said: "EU merger control has to make sure that company tie-ups do not lead to reduced innovation, higher prices or reduced choice for consumers and do not restrict competition in the internal market. I believe that ensuring that markets are competitive is key both to spur much needed innovation and investment in European telecoms markets, as well as to offer affordable prices to consumers."

"Every case has to be assessed on its own facts and merits. In this specific case, based on the Commission's in-depth analysis and evidence gathered, we are convinced that the significant competition concerns required an equally significant remedy. This means the creation of a fourth mobile network operator.  What the parties offered was not sufficient to avoid harm to competition in Danish mobile markets," she said.

Ichay said the Commission's decision in the case indicates how it might assess other planned telecoms merger deals in future. One proposed merger deal in the market is Hutchison Whampoa’s attempted takeover of O2, the UK mobile operator, from Spain’s Telefónica.

Earlier this summer French construction and communications company Bouygues rejected an offer from Altice subsidiary Numericable SFR for its Bouygues Telecom unit after the French government had expressed competition concerns. A merger of the companies would have reduced the number of main competitors in the market from four to three.

"There is a not a magic number of operators within all telecoms markets that need to co-exist for there to be said to be competition in that market," Ichay said. "The precise number will depend on factors such as the size of the jurisdiction and how telecoms is embedded in that market - for example, whether mobile-based technologies are widespread and offer effective alternatives to fixed-line services."

Ichay said that it is possible that restrictions on big European telecom companies' ability to acquire smaller operators in the market could result in more of those smaller operators being acquired by telecoms companies based in Asia. He said there is already evidence of interest in the European market from Asia-based operators. In May it was reported that Hutchison Whampoa was in talks with VimpelCom, a Russia-based telecoms provider, over setting up a joint venture company to compete in the Italian mobile telecoms market.

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