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Summary

The European Commission (EC) has launched an investigation into the proposed €21.8bn merger of Wind Telecomunicazioni and 3 Italia, which was agreed in August 2015. Similar merger proposals in the UK (between Three and O2) and France (between Orange and Bouygues) have also been subject to discussion recently. The French deal eventually fell through, while a decision on the UK deal is expected by May 19, 2016. For permission to be granted, operators will need to be prepared to accept tougher obligations as regulators are keen to maintain competition.

Operators are offering up network access in the hope of getting the deals through

Wind is the third-largest mobile network operator in Italy, while 3 Italia is the fourth, but the merged entity would jump up to first place in terms of subscriber numbers with an overall market share of 37%, ahead of Telecom Italia (32.4%) and Vodafone Italy (26.4%). The firms have claimed this would create a more sustainable business offering and improved customer service; 3 Italia especially has been struggling amid intense competition in the market, so it hopes that the combined organization would be more competitive. However, the EC has concerns that it could lead to higher prices, less choice, and reduced innovation, as well as to less negotiating power for the country's MVNOs. It has therefore launched an investigation into the proposal, with a decision expected by August 10, 2016.

Working in their favor is the advantage the merger would bring to the fixed sector, which has largely been dominated by Telecom Italia (TI), with limited competition from others. The new business would be better placed to compete with TI, particularly through its ability to bundle fixed and mobile services, which could lower prices and increase consumer choice. The telcos have also argued that rather than reducing investment, the new business would in fact have the scale, finances, and cost structure to further develop its high-speed mobile and fixed networks. Although 3 Italia is expected to offer frequencies and network access to rivals, this may not be enough to guarantee EC approval.

Across Europe, the recent trend in the telecoms sector has been toward consolidation, with a number of merger proposals on the cards that would reduce market size from four providers to three. Regulators are keen to ensure that operators have the scale to invest more in infrastructure, but not at the expense of competition in the market. As a result, some deals have fallen through after discussions with the EC over remedies did not result in agreement. Plans to merge the Danish operations of Telenor and TeliaSonera, for example, collapsed after being subject to conditions that the operators deemed unacceptable. However, several deals – such as those in Austria, Germany, and Ireland – have gone through, albeit with varying degrees of success. Subsequent reports have indicated that consolidation in the Austrian market has led to a significant price rise, particularly in the short term.

After much debate in France, merger negotiations between Orange and Bouygues Telecom have also collapsed. The determination of the French government to continue to be the main shareholder in Orange caused some complications in the negotiations, as the French Economy Ministry had proposed to cap Bouygues' potential stake in Orange for seven years. The government has subsequently increased its direct voting rights in Orange to 21.14% under the Florange Act, which doubles voting rights for long-term shareholders from 2016, while maintaining its direct equity share of 13.44%. Other key sticking points included social guarantees for Bouygues' employees, the level of its stake in Orange, the valuation of its telecom business, and the difficulty in negotiating with the other operators to buy a sufficient quantity of Bouygues' assets. Consolidation in the French telecoms market now looks unlikely, despite it seeming vital in encouraging further investment, as profits have diminished since the fourth operator, Free Mobile, entered the market. The third-largest operator, Bouygues, will be hit hardest by the failure of the merger as it continues to struggle to compete against the rest.

Like the Italian telcos, Three and O2 in the UK are awaiting authorization from the EC for their own merger, which would also create the largest MNO, with a 40% share of the market. The UK regulator, Ofcom, and more recently the Competition and Markets Authority (CMA), have been vocal in their concerns and advocate maintaining a four-operator market. It is likely that permission will only be granted along with tough obligations such as supporting MVNOs or the entry of a fourth provider to maintain competition. Operators have begun to anticipate these types of obligations by offering up access to their networks to try to ease concerns. Three has already offered around 30% of the capacity on the merged network to rivals in an effort to alleviate competition fears, along with its 50% stake in virtual operator Tesco Mobile.

Appendix

Further reading

"As regulators' reports show, consolidation in European mobile markets causes prices to rise," TE0007-001004 (March 2016)

"The merger of 3 and Wind in Italy might not be a headache for regulators," TE0007-000932 (August 2015)

Author

Sarah McBride, Analyst, Regulation

sarah.mcbride@ovum.com

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