Telefónica’s takeover bid to become Germany’s biggest mobile operator is hitting far-reaching antitrust objections from Brussels, raising the prospect of big asset sales that may undercut the sector’s newfound enthusiasm for consolidation.
The European Commission has told Telefónica to expect a formal complaint against its €8.6bn bid for E-Plus, KPN’s German mobile unit, by Tuesday, according to people familiar with the talks.
It will argue the deal could damage competition and would be likely to increase prices in retail and wholesale markets, with Telefónica dominating segments such as pre-pay mobile with almost a 60 per cent market share.
These tough conclusions presage a negotiation over potential remedies that will, as a minimum, touch on shedding valuable spectrum, which carries fast mobile services. To address the objections Telefónica would need to provide cut-price access to rivals that want to use their networks on a wholesale basis, according to people involved.
Brussels will serve its so-called “statement of objections” as industry executives gather in Barcelona for the Mobile World Congress, where the Telefónica deal will be closely watched as a transformative example for Europe’s fragmented mobile sector.
Europe’s telecoms business is entering its first major bout of consolidation since the privatisation of monopolies in the 1980s and 1990s, with groups in Italy, France and the UK openly discussed as possible targets.
But the in-country dealmaking hangs on how Brussels’ polices competition. Telefonica’s bid cuts the number of operators to three, a level of concentration that test the limits of Brussels merger control regime. A smaller 4-to-3 deal in Ireland– where Hutchison Whampoa is buying Telefónica’s business – is also facing EU objections.
Joaquín Almunia, the EU competition chief, has spoken out against national mergers that prompt “higher prices and less quality” and has urged executives to consider cross-border deals instead. But, last year, he cleared a 4-to-3 merger in Austria with two main conditions: that spectrum was set aside for a fourth entrant and a virtual operators came into the market.
While the severity of the requirements initially surprised the sector, no fourth network operator materialised and Austrian retail prices have increased significantly as virtual operators complete preparations to enter the market.
The Austria experience is weighing on the commission as it calibrates its response to Telefonica’s move, which causes more significant competition problems in Europe’s main retail market. Prices in Germany are already much higher than in Austria and the post-merger group would be a market leader.
Industry executives argue the consolidation is vital to steady declining revenues and drive investment. Some fear a regulatory barrier to in-country consolidation will leave them as easy prey for overseas groups, such as AT&T of the US.
Statements of objections are not uncommon in antitrust reviews. Telefónica will be given the opportunity to challenge the findings and hold a hearing. The Commission currently has a May 14 deadline to decide on the merger.
Get alerts on Telefonica SA when a new story is published