Telefonica and KPN remain confident their planned €8.6bn (US$11.7bn) E-Plus deal will win regulatory approval despite receiving a reportedly strong statement of objections (SO) from the European Commission.
Yesterday, the EC issued a “tough…
Telefonica and KPN remain confident their planned €8.6bn (US$11.7bn) E-Plus deal will win regulatory approval despite receiving a reportedly strong statement of objections (SO) from the European Commission.
Yesterday, the EC issued a “tough complaint” against the deal – which would reduce the number of players in the German mobile market from four to three – signalling that it could be blocked without significant asset sales and concessions, the Financial Times reported citing people familiar with the draft document.
Antitrust officials are concerned the deal would cause the average price of a mobile plan to increase by 13% to 17%, the report stated. Pre-paid customers would bear the brunt of this with 26% to 37% price rises, while contract customers would face increases of 9% to 12%.
However, a spokesperson for Telefonica Europe said the group is optimistic that it will be able to convince authorities to clear its planned takeover of Germany’s number four mobile network operator, arguing that a strong third player will “foster competition to the benefit of the customers”.
Meanwhile, a spokesperson for Dutch telco KPN noted that the issuance of an SO is common practice in such a review process and in line with its expectations. He contended that the merged Telefonica Deutschland-E-Plus entity will boost competition in Germany by being comparable in size and market presence to the two largest players, incumbent Deutsche Telekom and Vodafone.
Analysts have also generally been optimistic that the review, which is being closely watched throughout the European Union, will eventually receive clearance, albeit with concessions.
Paul Marsch, a senior telecoms analyst with Berenberg, said his team challenges the consensus view that the deal will be cleared with relatively light concessions as a kind of “bargain” indicating that mergers will be looked upon more favourably going forward.
He noted that the EC, particularly during competition commissioner Joaquin Almunia’s tenure, has always imposed relatively significant remedies on approved deals, pointing to Austria and the UK as prime examples.
In Marsch’s view, the reported price increases, which occurred in Austria soon after the EC cleared Hutchison Whampoa’s takeover of Orange Austria, were a tactical error on operators’ behalf, reducing the chances of similar deals being approved in the future.
“It was like waving a red flag at a bull for the EC,” he commented.
Marsch said he is about 90% confident that the deal will be cleared, albeit with “material” remedies. These may include spectrum divestments and concessions aimed at bolstering MVNOs’ competitive position in the market. The parties could also be required to grant spectrum and/or access to infrastructure to a potential new market entrant and perhaps even have to find the new player themselves, he noted.
This could prove a lucrative opportunity to an operator with deep enough pockets looking to enter the German market, he said, adding that Carlos Slim’s America Movil and Hong Kong’s Hutchison, both already present in European markets, could emerge as viable contenders. John Malone’s cable giant Liberty Global (LGI), Japan’s Softbank and China Mobile cannot be ruled out either, he said.
While there is a chance concessions could be tough enough for the parties to walk away, Marsch said he believes Telefonica is very committed to the deal.
Stephane Beyazian, an analyst with Raymond James, also expects the EC to clear the deal but may require the merged entity to allow MVNOs “very cheap” access to its network.
Yesterday, Telefonica Deutschland (O2) CEO Markus Haas argued that there is a “strong case” for approving the deal, saying there are no indications it would alter Germany’s healthy MVNO market. Speaking on a conference call on the company’s Q4 2013 results just before the SO was delivered, Haas also contended that the merged entity would be in a much better position to provide the continued investment in technology that the shift from voice to data services demands.
The next key step in an EC phase two procedure after the issue of an SO is usually an oral hearing, during which third parties, such as the German Federal Cartel Office, also have a voice. The hearing takes place about two weeks after an SO has been issued.
The companies will have an opportunity to offer improved remedies at a later stage in the process.
