This article was produced by Olswang LLP, which joined with CMS on 1 May 2017.
UK competition authority clears acquisition of EE
On 15 January 2016 the UK competition authority, the Competition and Markets Authority (the “CMA”) published its final decision clearing the acquisition of UK mobile network operator, EE, by UK telecommunications operator BT. The CMA’s decision confirmed that the merger is not expected to result in a substantial lessening of competition (“SLC”) on any market in the UK and the acquisition was cleared without any conditions, meaning that the parties are now able to complete the transaction and start integrating their businesses.
BT is the UK’s largest fixed telecoms business, providing wholesale voice, broadband and data communications products and services to fixed and mobile network operators (“MNO”). It also provides telecommunication products and services to retail customers. EE is the country’s largest mobile telecoms business, providing mobile and fixed communications services to retail customers and wholesale mobile services to other communications providers.
The businesses of BT and EE overlap in the provision of mobile and fixed communications services to retail customers. Additionally, EE provides BT with wholesale mobile services and BT provides EE with mobile backhaul and wholesale broadband services, as well as local access network services, regulated backhaul and leased line services through its Openreach division.
Background to the transaction
The CMA launched its inquiry of the transaction on 18 May 2015, at which time BT submitted a request for a fast-track reference to an in-depth, Phase II investigation. The CMA will make a fast-track reference to Phase II where it believes that it has sufficient evidence to demonstrate that there is a realistic prospect of an SLC in relation to the markets affected by the transaction – in this case the supply of:
- wholesale access and call origination services to mobile virtual network operators; and
- fibre mobile backhaul services to mobile network operators in the UK.
The CMA announced its decision to fast-track the transaction to Phase II on 9 June 2015, thereby substantially shortening the length of the Phase I investigation - the statutory deadline for the conclusion of which was 14 July 2015.
The CMA’s Phase II investigation, which is drawn to a close by the publication of the final decision, assessed whether the transaction would result in an SLC within any market in the UK. In particular, the CMA considered the effect of the transaction on five different services offered by BT and EE: retail mobile, wholesale mobile, mobile backhaul, wholesale broadband and retail broadband. In its assessment, the CMA identified the telecoms sector as being “dynamic and innovative”, and in recognition of this the CMA’s forward-looking merging assessment took account of a number of additional factors when assessing the transaction. These included the potential acquisition of Telefónica’s UK brand, O2, by Hutchison 3G which is currently subject to a Phase II investigation by the European Commission, and the Strategic Review of Digital Communications currently being conducted by Ofcom, the UK’s communications regulator, the findings from which are expected in early 2016. The CMA also took account of the anticipated increase in consumer demand for data.
Competitive assessment of the transaction
- On considering the competitive impact of the transaction on the retail mobile sector the CMA reached the conclusion that there was unlikely to be an SLC due to the fact that there is close competition between the four MNOs (EE, Vodafone, O2 and Three) active in the UK, in addition to which there is also limited competition from mobile virtual network operators (“MVNOs”). The CMA considered that any advantage BT might gain as a result of the transaction by virtue of its access to EE’s network services or customer base was not “unique” to BT and could be replicated by other MVNOs.
- EE provides BT with wholesale mobile services. BT resells these services at retail level both as a stand-alone service (mobile only) and as part of a fixed-mobile service bundle. The CMA found that the transaction was unlikely to lead to an SLC on the wholesale mobile services market. With respect to stand-alone services, the CMA considered that BT has a small share of the retail mobile market, and therefore the transaction would be unlikely to lead to the merged entity changing its behaviour towards MVNOs competing in the field of stand-alone services. Regarding competition on the market for fixed-mobile service bundles, the CMA found that even if the merged entity was to engage in behaviour to harm competition (such as refusing to supply mobile services or providing a worse service under existing contracts), such behaviour would have a limited impact because in addition to contractual protection against the degradation of services, competing MNOs are able to provide similar services and are therefore available as alternative providers in the event that an MVNO becomes unhappy with the service provided by the merged entity.
- On the market for mobile backhaul the CMA considered whether the merged entity might seek to foreclose MNOs from the market by pursuing strategies such as increasing the price of Openreach Ethernet products, or by degrading the quality of the Openreach Ethernet leased lines provided to competing MNOs. However, it was concluded that these strategies were unlikely to be put into practice because of the regulation (including charge control) applicable to Openreach’s Ethernet products. The CMA also ruled out the ability of the merged entity to foreclose rival MNOs at contract renewal, finding that MNOs would be able to protect themselves against the most material risks through commercial negotiations. It also concluded that there was no risk of margin squeeze on the basis that the reduction of EE’s backhaul costs as a result of the transaction would not be large enough to allow a reduction of retail prices which would give rise to a marge squeeze.
- Also on the market for mobile backhaul, the CMA considered whether the transaction might result in customer foreclosure – namely whether the merged entity might have an incentive to self-supply dark fibre, and whether this might result in the impediment of the roll-out of fibre networks across the UK more generally. The CMA noted that there are a lot of uncertainties concerning the development of the dark fibre market (which is itself already subject to review by Ofcom). Ultimately the CMA concluded that, whilst following the transaction the merged entity might stop purchasing dark fibre from third parties, this in itself is unlikely to foreclose independent fibre networks.
- On the wholesale broadband market the CMA considered whether, following the transaction, the merged entity would have an incentive to increase prices or degrade the quality of fixed wholesale broadband which it provided to other communications providers so that they, in turn, can provide retail broadband services to consumers. The CMA concluded that charge control regulation already in place should prevent the merged entity from either degrading the quality of wholesale broadband services or from increasing prices such as to foreclose rivals from the market.
- Finally, the CMA considered whether the transaction would result in an SLC on the market for retail fixed broadband (for both rural areas and super-fast broadband). For broadband services provided in rural areas the CMA concluded that there would be no SLC because EE only competes with BT in these areas to a very limited extent. In addition, it was found that there are no material obstacles to entry to the market for the provision of broadband in rural areas. The CMA noted that the market for super-fast broadband is growing “rapidly” and that further growth is expected. However, although EE is active on the super-fast broadband market it is not a significant competitive constraint on BT for the supply. Therefore the loss of EE as a separate competitor on the market for retail super-fast broadband was not expected to result in an SLC.
Commentary
Now that the CMA has published its final decision, BT and EE can complete the transaction and start integrating their businesses, bringing together the largest fixed and mobile telecoms businesses in the UK. However, for those with a vested interest in the UK telecoms market, this is not the only change afoot with potential to alter the UK telecoms landscape. The European Commission is currently conducting a Phase II investigation of the proposed acquisition of Telefónica’s UK brand, O2, by Hutchison 3G, a merger which if cleared without conditions will reduce the number of MNOs on the UK market from four-to three, thereby potentially altering the dynamics of competition on the UK market even further.
Whether or not this proposed acquisition will be unconditionally cleared by the Commission is currently subject to significant debate. The European telecoms market has recently seen an extended period of consolidation between major telecoms players in various EU Member States. The result of such consolidation has been a number of merger decisions which indicates a certain reluctance on the part of the Commission to clear deals reducing the number of operators on a market from four-to-three without certain divestment conditions to ensure wider access to infrastructure. Most recently a proposed joint venture between Telenor and TeliaSonera in Denmark collapsed due to a reported failure to reach agreement between the parties and the Commission over suitable remedies to resolve competition concerns arising as a result of the proposed joint venture.
In addition to a spate of consolidation concerns, the UK telecoms market is also currently subject to the Strategic Review of Digital Communications by Ofcom. The Strategic Review seeks to address the future of mobile, landline and broadband in the UK, taking account of policy challenges such as investment and innovation and achieving sustainable competition. The Review will also consider the regulatory landscape in the UK with a view to identifying where more targeted regulation is required, as well as where deregulation may be suitable. For those concerned about competition on the UK telecoms market following the clearance of the BT acquisition of EE, maintaining and even reinforcing current regulation will be seen as an important outcome of the Review. For others, the Review is considered an opportunity to seek deregulation for certain services with a view to fostering competition.
The CMA’s final decision on the BT acquisition of EE highlighted that the UK telecoms market was both dynamic and innovative – this is reflected by these developments, and no doubt will continue to be shown to be the case as technological advances strive to meet consumer demand. To keep up to date with these developments, follow Olswang’s Competition Telecoms Bulletin.
