Thu 06/11/2020 14:47 PM
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Takeaways
 
  • The EU General Court’s decision to overturn the 2016 prohibition of the O2/Hutchison deal by the European Commission could pave the way for further consolidation and a reimagining of European antitrust standards in oligopolistic markets.
  • A U.K.-based competition law practitioner told Reorg that companies that have agreed to or are considering a transaction in the European telecom space are likely to carefully examine the judgment because it “says a lot about the evidentiary standard that the commission has to meet if it wants to prohibit a merger.”
  • The judgment coincides with the recent announcement of two significant telecom deals in the United Kingdom and Spain: Telefónica SA and Liberty Global’s agreement to combine their U.K. businesses and the purchase of Masmovil Ibercom SA in Spain by private equity funds.
  • The technological requirements of 5G network deployment could make antitrust considerations of future deals complex, as governments must balance an interest in developing networks quickly with possible concerns that consolidation could result in anticompetitive effects.

The EU General Court’s decision to overturn the 2016 prohibition of the O2/Hutchison deal by the European Commission could pave the way for further consolidation and a reimagining of European antitrust standards in oligopolistic markets.

The judgment, released late last month, essentially changes the European Commission’s standard of proof for blocking deals in markets with four or fewer major players. Given the value of the precedent, practitioners told Reorg they would be surprised if the commission did not appeal the decision. The commission’s Directorate-General for Competition, or DG Comp, would likely want “as much clarity as possible to understand what they have to do” to prohibit a merger, said David Cardwell, a competition law practitioner at Baker Botts in Brussels.

While the commission may be likely to appeal the EU General Court’s judgment, the process could take two to three years before the European Court of Justice renders a final decision in the case. Studying the specifics of the court’s judgment may not be entirely helpful to merging parties or companies contemplating a transaction since the judgment is still subject to change. However, Cardwell said the court’s decision “changes the temperature in the room” regarding deals in concentrated markets and gives companies a boost in their discussions with the commission.

A U.K.-based competition law practitioner said companies that have agreed to or are considering a transaction in the European telecom space are likely to carefully examine the judgment because it “says a lot about the evidentiary standard that the commission has to meet if it wants to prohibit a merger.” In their submissions, the parties will want to make sure they are putting forth evidence so that the commission does not meet this standard, the practitioner said.

The judgment coincides with the recent announcement of two significant telecom deals in the United Kingdom and Spain: Telefónica SA and Liberty Global’s agreement to combine their U.K. businesses and the purchase of Masmovil Ibercom SA in Spain by KKR & Co., Cinven Ltd. and Providence Equity Partners LLC.

Current consolidation of the European telecommunications market comes on the back of expansive plans for 5G development. The current 4G LTE infrastructure that is in place will not be replaced but will be repurposed for higher-latency uses such as talk and text, whereas the 5G infrastructure will overlay the current network to allow for low-latency applications such as streaming, industrial IOT and high-bandwidth applications.

Operators that have expansive 4G LTE networks, such as Telefónica, are likely to remain at the forefront for developing 5G. Therefore, any consolidation that takes place now, such as the Telefónica deal with Liberty Global, is likely to affect 5G deployment.

In a 2019 report published by Swedish consultancy Northstream, which is owned by Accenture, Europe was said to be “at a risk of falling behind other developed regions when it comes to rolling out 5G.” To facilitate 5G deployments, Northstream suggested that policymakers review practices regarding new entrants and market consolidation “in order to create market players that can roll out and run networks in the most economical manner.”

The consultancy said that while mid-band spectrum - critical assets needed for the deployment of 5G - is more available in Europe than in the United States, assignments are not well-coordinated across country borders and some auctions have resulted in asymmetric spectrum allocations across operators.

The combination of Telefónica’s O2 with Liberty Global’s U.K.-based Virgin Media business appears to pose less of an issue for competition authorities than Hutchison’s acquisition of O2 in 2016. However, the judgment by the EU court in the O2/Hutchison case may lead companies to reconsider deals they previously would not have pursued. Since Margrethe Vestager became European Commissioner for Competition in 2014, DG Comp has demonstrated opposition to mergers in the mobile services sector that would result in consolidation of national markets from four mobile network operators, or MNOs, to three.

Consolidation among MNOs would create a further barrier to entry for the market by decreasing the technological deployment timetable for incumbents. Competition authorities will have to continuously weigh the desire to develop 5G networks while maintaining a fair competitive environment.

Reorg’s previous coverage of this transaction can be found HERE.

--Alex Wilts and Nils Tracy
 
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