Hutchison hits back at CMA over Three-O2 merger criticism

CK Hutchison has retaliated against the UK competition regulator’s letter to the European Commission (EC) attacking the planned merger between its local unit Three and O2, saying it “can have no legitimate status in the merger control process”. Competition and Markets Authority (CMA) CEO Alex Chisholm today wrote to competition commissioner Margrethe Vestager outlining the authority’s “serious concerns” about the £10.25bn (US$15bn) deal.

CK Hutchison (SEHK:0013) has retaliated against the UK competition regulator’s letter to the European Commission (EC) attacking the planned merger between its local unit Three and O2, saying it “can have no legitimate status in the merger control process”.

Competition and Markets Authority (CMA) CEO Alex Chisholm today wrote to competition commissioner Margrethe Vestager outlining the authority’s “serious concerns” about the £10.25bn (US$15bn) deal, which would reduce the MNO market from four to three.

“We believe this merger would give rise to a significant impediment to effective competition in retail and wholesale mobile telecoms markets in the UK,” he wrote.

He called upon the Commission “to act to prevent the long-term damage” to the local market both it and telecoms regulator Ofcom have predicted will result from the merger.

Hong-Kong based Hutchison said it is “very disappointed” in the CMA’s move, saying that while both it and Ofcom have always opposed the deal, it is up to the Commission to assess competition issues.

“It is interesting to contrast the content of the letter with the attitude of the CMA (when it was the decision maker) and Ofcom in the BT-EE merger clearance, which was approved without conditions or remedies, creating a dominant fixed-mobile behemoth in the UK market,” the company noted.

In its letter, the CMA said its supports the EC’s statement of objections to the deal, presented in February, saying it “clearly detailed how this merger is likely to lead to increased prices and/or a reduction in the quality offered to UK consumers”.

The watchdog argued that the remedies offered by the merging parties to address competition concerns “fall well short” of the relevant legal standard.

“The proposed remedies are materially deficient as they will not lead to the creation of a fourth mobile network operator (MNO) capable of competing effectively and in the long-term with the remaining three MNOs such that it would stem the loss of competition caused by the merger.

“In addition, they fail to address concerns arising from the presence of the merged entity in both the network sharing arrangements, including the greater risk of coordination that this brings.”

The CMA contended that the only appropriate remedy would be the divestment, to a Commission-approved buyer, of either the Three or O2 mobile network business, in full or with “limited carve-outs”. The divestment would need to include the mobile network infrastructure and enough spectrum to ensure a fourth MNO could be established, the watchdog argued.

Hutchison decried the CMA’s suggestion that the creation of a fourth MNO is the only possible remedy as “an entirely one-sided argument”, adding that its proposed concessions go beyond those accepted by the Commission in previous mobile merger cases.

“Hutchison has commitments with Sky, Virgin, Tesco and UK Broadband to take up over 40% of combined network capacity to drive competition in the UK mobile market. It is astonishing that the CMA has failed to refer to this and has not assessed the impact of entry of such large, committed players on the competitive landscape.”

The Hong Kong company said the suggestion that it divest Three or O2  to a new MNO is “a red herring” as there would be no buyer and it would undermine the economic rational of the merger.

Hutchison argued that the deal stands to benefit the UK mobile market as it would strengthen infrastructure, give consumers a greater number of mobile operators to choose from and result in faster internet speeds, better services and improved rural coverage. The company noted that it has also pledged to freeze mobile prices for the first five years.

“We are confident that the Commission will exercise its legal obligation to review the case on its merits and take into account the impact of the plans of the remedy takers and new market entrants on competition and pricing in the UK mobile market,” it concluded.

Last week, news emerged that Hutchison had agreed deals worth £3bn (US$4.2bn) with Sky and Virgin Media granting them access on its network in a last-ditch bid to persuade the EC to approve the merger.

The Commission, which has expressed concerns that the deal would result in higher costs for customers, now has until 15 May to decide whether or not to approve it.

Hutchison agreed in March 2015 to acquire O2 from Spain’s Telefónica (MAD:TEF) and, in May, said it would sell a 32.98% stake in Three-O2 to five institutional investors. The latter is subject to the main deal completing.