Mallinson: Brexit referendum affects EC decision on proposed Three/O2 UK merger

Keith Mallinson

The decision on whether or not the proposed merger of O2 and Three in the UK should be allowed has become very political.

With the possibility of Brexit following the UK referendum on Jun. 23 and with an imminent European Commission (EC) competition authority decision on the proposed merger of O2 and Three in the UK, a second UK agency is demanding the deal be blocked. Ofcom's CEO, Sharon White, made a public statement against the deal in January. She called on the EC to block the proposed deal, citing concerns that a merger would drive up prices and disrupt existing UK network-sharing arrangements. The UK Competition and Markets Authority (CMA) has followed suit with similar demands in an open letter to the European Commissioner for competition, Margrethe Vestager, who is currently investigating the proposed merger and has the authority to prohibit, approve or impose conditions on the deal.

Alex Chisholm, CEO of the CMA, wrote that the EC should block the merger if it cannot be guaranteed that a fourth MNO would be maintained through the sale of the Three or O2 mobile network businesses "in entirety, or possibly allowing for limited 'carve-outs' from the divested business." The CMA believes this merger "would give rise to a significant impediment to effective competition in retail and wholesale mobile telecoms markets in the United Kingdom."

The run up to the Brexit referendum is a particularly delicate time for the UK to appear to be in any contention with Brussels. Are these announcements by Ofcom and the CMA public displays of emerging consensus or are there significant differences of opinion between these UK agencies and Brussels? According to the Financial Times newspaper "the timing of Monday's intervention by the Competition and Markets Authority is crucial because it offers political cover to Margrethe Vestager…to block a tie-up about which she has already expressed serious concerns." As also reported by the FT, "when asked whether her hands were tied by the precedent of her predecessor having approved four-to-three deal[s] in Germany, Ireland and Austria she sounded tough -- and made a pun. 'We do not work with magic numbers. Not even when Three is involved.'" She has already blocked a comparable four-to-three mobile MNO deal in Denmark.

It seems unlikely that statements by Ofcom, the CMA and the EC are coordinated tough talk to wring out further concessions from the parties to the deal. CK Hutchison is reported to have signed network capacity deals with Sky and Virgin Media to help secure approval of its proposed merger. It has also previously said it is considering the sale of a stake in Three UK to another investor, in a move that could lead to Three and O2 being maintained as separate entities in future.

The FT indicates Ms Vestager could be under political pressure to make her decision prior to her May. 19 deadline in order to clear the air well before the UK referendum. That makes sense if one goes with the prevailing view that she will block the deal. On the other hand, if the parties can persuade her to approve it with concessions while Ofcom and the CMA remain opposed, it might be better for her to find a reason to delay her decision until after the referendum. I presume the Commission does not want to antagonise voters in ways, such as disagreeing with UK agencies, which might make them vote for Brexit.

The Commission's decision, announcement and its timing is now as much about managing the optics as it is about reconsidering the deal and potential remedies on the merits.

Keith Mallinson is a leading industry expert, analyst and consultant. Solving business problems in wireless and mobile communications, he founded consulting firm WiseHarbor in 2007. Find WiseHarbor on Twitter @WiseHarbor.