Telecoms merger cases will be shaped by new EU ruling

Out-Law News | 29 May 2020 | 9:51 am | 2 min. read

A new ruling by an EU court will define how competition authorities in Europe assess proposed mergers in the telecoms sector and other markets dominated by only a few businesses for years to come, a competition law expert has said.

Angelique Bret of Pinsent Masons, the law firm behind Out-Law, was commenting after the EU's General Court annulled a decision the European Commission took in 2016 to block the planned merger of mobile network operators (MNOs) Three and O2 in the UK. The General Court is the first-instance court responsible for considering appeals against decisions taken by the Commission in merger control cases.

At the time of its decision, the Commission said the proposed £10.25 billion deal, which would have seen Hutchison Whampoa, the Hong Kong-based owner of Three, purchase O2 UK from Spain's Telefónica, would have "significantly reduced competition" in the UK mobile market. If the merger had proceeded, just three major MNOs would have remained in the UK market - the combined Three/O2 entity, BT/EE and Vodafone. However, the General Court said the Commission made several "errors of law and of assessment" when it considered what harm might arise from allowing the merger to proceed.

The Commission had identified three so-called 'theories of harm' in relation to the merger which it cited as reasons for blocking the deal.

The first of its concerns was that it believed the merger would impact competitive constraints in the retail market and likely lead to price increases and a reduction of choice for consumers. The second concern was that, because of network sharing agreements in place in the market already, the deal could negatively influence the quality of services for consumers and hinder the development of mobile network infrastructure in the UK. The Commission's third concern centred on the potential impact of the merger on the wholesale market, where three mobile virtual network operators rely on the major MNOs in the UK for access to networks.

The General Court said, however, that the Commission "had not succeeded in proving that the notified concentration would generate non-coordinated effects capable of constituting significant impediments to effective competition" in either the retail or wholesale markets under any of the three theories of harm.

In its ruling, the General Court made clear that competition authorities, to have grounds for blocking a merger on the basis it "may result in a significant impediment to effective competition", must be able to demonstrate that the concentration of the businesses would involve both "the elimination of important competitive constraints that the merging parties had exerted upon each other and a reduction of competitive pressure on the remaining competitors". The Commission must produce "sufficient evidence to demonstrate with a strong probability" that significant impediment to competition would result from the transaction in question.

The court said, though, that the Commission had failed to establish that Three was an "important competitive force" at the time of the proposed merger in the UK retail market.

The court also held that the "low degree of product differentiation" in the mobile market, and associated fact that operators in the market will be close competitors, is a factor that cannot on its own be relied upon as demonstrating that "the elimination of the important competitive constraints that the parties to the concentration exerted upon each other and thus the existence of a significant impediment to effective competition". The "mere effect of reducing competitive pressure on the remaining competitors" is not of itself enough to prohibit a merger.

Bret said: "The General Court's focus on how the 'significant impediment to competition' test should be applied goes to the heart of EU merger control. In previous telecoms cases, the Commission has generally considered 'four-to-three' mergers to be problematic. This judgment increases the evidential burden on the Commission to prove that a reduction in the number of operators on a market would lead to higher prices and/or lower service levels for consumers, without the need for any coordination between the remaining operators. The judgment suggests that a key consideration would be whether 'an important competitive force' would be removed from the market. This case will have a significant impact on all future investigations of mergers between competitors in concentrated markets – not just in the telecoms sector. "