Business World

Friday 20 April 2018

EU telco mergers put it up to regulators

Cornelius Rahn

WITH proposed deals valued at more than $11bn, Telefonica and Vodafone are laying down a challenge to European regulators who have a history of opposing moves that reduce competition in telecommunications.

Telefonica has agreed to sell its mobile-phone business in Ireland to Hutchison Whampoa to create a stronger No 2 carrier to take on leader Vodafone.

Separately, Vodafone announced the takeover of Kabel Deutschland, merging Germany's biggest cable operator with its own landline and wireless networks to offer combined internet, TV and mobile services in Europe's largest economy.

Both transactions will probably be referred to the European Commission, the European Union's regulatory arm, which last year sought to block Vodafone's attempt to merge with a rival in Greece and imposed concessions before allowing Hutchison to combine Austria's third– and fourth-largest wireless operators.

By pushing deals that cut competition, carriers are betting they can set precedents for more consolidation, said Guy Peddy, a telecommunications analyst at Macquarie Bank in London.

"From a benchmark perspective it will be very interesting to see how regulators perceive Ireland," Peddy said.

The fact that Hutchison is prepared to go through another antitrust review after its prolonged process to acquire Austrian operator Orange last year shows that "they're not being put off by it."

The combination of Telefonica's O2 unit with Hong Kong-based Hutchison's Three brand will cut the number of network operators here in Ireland to three from four and create a carrier with a 34.9pc share of the country's mobile-phone subscriptions. Vodafone was the largest with 40.6pc, while Eircom had 20.6pc.

The merged companies had 2012 revenue of €803m, Three Ireland said.

Robert Finnegan, chief executive officer of Three Ireland, said he expects the purchase to undergo a thorough review to determine whether it's in line with European competition rules, but that Hutchison is experienced in dealing with regulators.

"The merger will give us the financial strength to be more aggressively competitive," Mr Finnegan said in a phone interview.

Vodafone's €7.7bn takeover of Kabel Deutschland would give the carrier access to the German company's 8.5 million cable households and create a national division with revenue of €11.5bn.

Christoph Fritsch, a spokesman for Germany's Federal Cartel Office, said while the government agency hasn't received a filing on Vodafone-Kabel Deutschland, it would assess the transaction on its merits.

A review on Kabel Deutschland by the European Commission will probably be necessary because the deal exceeds legal limits for revenue, he said. Those thresholds include combined global sales of the transaction parties exceeding €5bn, according to European Union rules.

Phone companies from Deutsche Telekom to France Telecom have seen revenue and cash flow decline for years as customers look for cheaper rates during the region's debt crisis and network watchdogs order cuts in fees for roaming and interconnection with other providers' grids.

Telecoms chief executives across Europe have asked for a "new regulatory approach" that would ease restrictions on pricing to help the carriers increase revenue and fund investments in their networks.

Neelie Kroes, European Commissioner for the Digital Agenda, nodded to that in a speech to the European Competitive Telecommunications Association in Brussels.

While pushing carriers to build high-speed networks across borders to help Europe keep pace with technology in Asia and the US, these investments need "the right legal framework," she said.

"I worry about businesses that use the single market being left stranded without the communications to match," Ms Kroes said.

"I worry about you not being able to innovate, grow, compete. If not dying then becoming a pack of zombies. I worry about the competitiveness of our continent – as America and Asia take the lead." Globally, more than $200bn in telecommunications deals have been announced in the past 12 months. Of those, European targets accounted for about $38bn, led by Liberty Global's deal for Virgin Media.

Telecommunications merger and acquisitions in the US have picked up since authorities blocked AT&T's takeover of Deutsche Telekom's US business in 2011.

Deutsche Telekom has moved on and this year completed a merger of T-Mobile with MetroPCS Communications Inc Japan's SoftBank plans to complete a takeover of Sprint Nextel next month.

While phone and cable takeovers in Europe are also picking up, moves such as those by Telefonica and Vodafone are gambles as governments aren't always consistent in their regulatory positions, said Peter Braendle, who helps manage $60bn at Swisscanto Asset Management in Zurich.

"Governments all try to be liberal or give the message that they are open for international global transactions," said Mr Braendle. Yet, moves such as blocking transactions and reducing roaming fees will be tempting because "they are very popular with consumers or with voters", he said.

Vodafone's deal to buy Kabel Deutschland will not only challenge Germany's former phone monopoly, Deutsche Telekom.

It will also put pressure on KPN and Telefonica to resume talks about a combination of their German wireless divisions, the third and fourth operators, behind Vodafone and Deutsche Telekom, said Robin Bienenstock, an analyst at Sanford C. Bernstein.

In Italy, Telecom Italia is evaluating a combination of its wireless business with Hutchison's local unit.

Vodafone is considering an acquisition of Fastweb, Swisscom's Italian fixed-line division, sources said. Spain's cable operator Ono may also be a target for Vodafone or another carrier, Bernstein said. A Vodafone spokesman declined to comment on those scenarios.

"Europe is being reshaped, but not by regulators," Bienenstock wrote in a note. The region "is rapidly moving toward a series of integrated duopolies".


Irish Independent

Business Newsletter

Read the leading stories from the world of Business.

Also in Business