Legal Briefing

Commission clears Orange and T-Mobile merger with conditions

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Technology, Media and Telecoms | 01 April 2010

On 1 March 2010, the European Commission conditionally cleared the proposed merger between Orange UK Ltd (Orange) and T-Mobile (UK) Ltd (T-Mobile), during phase one of its investigation. To resolve the Commission’s competition concerns, the parties have agreed to amend an existing network sharing agreement with Hutchison 3G UK Ltd (H3G) and to divest a quarter of their combined spectrum in the 1800 MHz band, which could be used by rivals to run faster mobile broadband services.

Transaction

The proposed transaction consists of a 50:50 joint venture, encompassing the mobile businesses of Deutsche Telekom’s T-Mobile and France Telecom’s Orange, as well as Orange’s fixed broadband business. The Commission was notified of the proposed transaction under Council Regulation (EC) No 139/2004 (the EU Merger Regulation) on 11 January 2010.

The new joint venture company is expected to have a combined customer base of around 29.5 million and a market share of between 30%-35% (constituting an increment of between 10%-15%), which the parties state will make it the number one player in the UK mobile market.

Office of Fair trading Article 9 Request

Under Article 9 of the EU Merger Regulation, the Commission may refer a notified concentration to the competent authorities of a member state following a request by a member state on the grounds that:

  • the concentration threatens to affect competition significantly in a market within that member state, which presents all the characteristics of a distinct market (Article 9(2)(a)); or
  • the concentration affects competition in a market within that member state, which presents all the characteristics of a distinct market and which does not constitute a substantial part of the common market (Article 9(2)(b)).

On 3 February 2010, the UK Office of Fair Trading (OFT) announced that it had made a request under Article 9(2)(a) of the EU Merger Regulation for the proposed merger to be referred to it for investigation, on the grounds that the effects of the merger would be felt exclusively by consumers in the UK. The OFT also pointed to its expertise in the sector, including in dealing with mergers in the mobile sector and in examining spectrum allocation issues in the context of mergers. The OFT indicated a need for any spectrum divestment remedy to tie into the Digital Britain process.

In its Article 9 request, the OFT set out two main concerns that, when submitted, meant the proposed merger threatened to significantly affect competition. First, the OFT was concerned about the impact of the joint venture on the retail mobile telephone market, especially on H3G (the smallest mobile network operator in the UK). H3G and T-Mobile jointly operate a 3G radio access network (a radio access network (RAN)-sharing agreement). While the OFT agreed that this arrangement would not automatically be altered post-merger, H3G submitted that, as a result of the proposed merger:

  1. T-Mobile would not have any incentive to continue with the RAN-sharing agreement (the incentive argument); and
  2. the contractual arrangements between H3G and T-Mobile enable the latter to erode the RAN-sharing agreement, which could lead to foreclosure of H3G (the ability argument).

The OFT did not consider that the merger would enhance T-Mobile’s ability to terminate the agreement, but it did consider it likely to increase the possibility that H3G would be foreclosed if the RAN-sharing agreement were terminated. In addition, the OFT was of the view that the merger would impact on the incentives T-Mobile has to terminate the agreement. While the OFT noted that these were difficult and complex issues that would require closer consideration, it was concerned that the proposed merger gave rise to a risk that H3G could be significantly weakened or could exit the UK retail and wholesale mobile telephone market. According to the OFT, any weakening or elimination of H3G would effectively result in reducing the number of vertically integrated competitors from five to three and would cause significant detriment to competition in mobile telephone retail.

Secondly, the OFT was concerned that the joint venture could prevent competition from emerging in the fourth generation mobile telephone market. The merged entity would hold 84% of the available spectrum in the 1800 MHz frequency band, which is currently used for 2G mobile services. The OFT considered that there were plausible arguments that the 1800 MHz spectrum could be used by the joint venture to launch a national 2x20MHz long-term evolution (LTE) network. Indeed, O2 UK Ltd (O2) and Vodafone Ltd (Vodafone) submitted to the OFT that the joint venture would be the only mobile network operator with a clear path to full coverage, maximum-speed LTE technology.

The OFT noted that the appropriate counterfactual against which to measure the merger was uncertain, given the backdrop of the UK government’s Digital Britain Report. However, without the merger, the OFT considered it likely that there would be more than one national 2x20MHz LTE network operating in the UK in the short-to-medium term. Post-merger, however, the OFT considered that it was possible that the merged entity would have the only national 2x20MHz LTE network within the next two years. While it was possible that Vodafone and O2 could launch a national LTE network in the short term by pooling their spectrum or by acquiring additional spectrum at auction, the OFT noted that this would be limited to a maximum speed of 50Mbps, which would be inferior to the achievable speed of 2x20MHz. Finally, the OFT considered that the parties would have the incentive to exclude their competitors, as this would increase their customer base significantly and would not cost them anything.

Commission’s Investigation

The Commission’s final decision in relation to the merger has not yet been published. However, its press release states that the Commission did not identify any direct concerns in relation to:

  • the markets for the provision of mobile telecommunications services to end-consumers;
  • the wholesale market for access and call origination on public mobile telephones; and
  • the wholesale market for international roaming and related markets.

However, the Commission’s investigation did raise the same two concerns that had been highlighted by the OFT. To address the competition concerns identified by the Commission and to avoid a phase two investigation, the parties have therefore agreed to:

  • amend the existing radio access network agreement with H3G to ensure that there remain sufficient competitors in the market; and
  • divest a quarter of their combined spectrum (2×15 MHz) at the 1800 MHz level (Commission press release IP/10/208).

The Commission is satisfied that the commitments offered by the parties fully address its competition concerns. In addition, in light of the commitments offered by the parties, the OFT withdrew its Article 9 referral request.

Comment

It is relatively rare for the OFT to make a referral request to the Commission. Since 2004, the OFT has only made four such requests, one of which was later withdrawn. Consumer groups, such as Consumer Focus, have raised concerns that the merger should have been subject to an investigation by the UK regulators and not behind closed doors in Brussels (www.consumerfocus.org.uk). However, the Commission and the OFT have stated that they worked together closely (as well as with Ofcom) throughout the Commission’s investigation.

The merging parties insist that the merger will be good for competition on the basis that the new entity will be better placed to compete with O2 and Vodafone, which will ultimately lead to better value for consumers. Consumer groups, on the other hand, argue that the deal could push up the price of mobile phone contracts in the UK.

The merger comes at a time of significant flux in the UK mobile market, with plans for the government’s Digital Britain to auction more spectrum in the 800MHz and 2.6GHz bands. The release of this spectrum is expected to drive the development of superfast broadband across the UK. A protracted merger review threatened to hold up this process further, and the government’s and Ofcom’s plans would have been dependent on the structure of the market once any remedies have taken effect. Although the protection afforded to H3G and the release by the joint venture of the valuable 1800MHz spectrum will be costly to the merging parties, they (and their respective legal teams) are likely to be delighted with a phase one clearance.