Telecoms groups expected to revive mergers after EU court ruling

Bankers and lawyers acting for some of Europe’s largest telecoms companies are anticipating a bonanza of deals on the back of a court ruling last month that dealt a blow to the EU’s strict competition policy.

At the end of May, the General Court, the EU’s second-highest court, overturned the European Commission’s 2016 decision to block the £10.25bn takeover of O2 in the UK by its smaller rival Three, owned by Hong Kong conglomerate CK Hutchison. 

The ruling has potentially paved the way for a new round of consolidation in the telecoms sector, antitrust experts said. Its impact could also stretch into other industries, including steel, where the merger of Tata Steel and Thyssenkrupp was thwarted by the commission last year, as companies look to strengthen their hand.

Markets where there are still four mobile telecoms operators, such as Denmark and Sweden, have been tipped as candidates for consolidation. Hutchison, which struck deals to buy mobile rivals in Italy, Ireland and Austria before it was thwarted in the UK, is a potential consolidator, according to one person with direct knowledge of the company’s strategy. Hutchison declined to comment.

Margrethe Vestager, the EU’s competition commissioner, was opposed to a telecoms merger in her native Denmark in 2015. This led to the abandonment of a deal between Telia and Telenor to merge in the country, say people with direct knowledge of the matter. 

Spain, which has five telecoms participants, is also seen as a candidate for consolidation, particularly after MasMovil, the country’s fast growing challenger brand, agreed to be taken private by three large funds. That has led to speculation of a future tie-up with struggling Vodafone in the country or possibly Orange, the French-owned telecoms company, to reduce pricing pressure in the Iberian market. 

“The ruling will have knocked the commission’s confidence and it has called into question how aggressive they can be when blocking mergers,” said Sara Ashall, counsel in the antitrust practice of Shearman & Sterling in Brussels. 

“It has also given companies more confidence to try to merge. Even in cases where before they thought they didn’t have a chance, then may now give it a shot,” she said.

Brussels finds itself in a weakened position after the General Court ruled that the EU made “several errors of law” in assessing the potential harmful effects to consumers of the Three-O2 deal, and that it had not provided enough evidence that prices would rise or competition would suffer.

“Businesses with big deal plans will rejoice that the commission’s wings have been clipped, and mobile operators will be dusting off the consolidation plans they shelved four years ago,” Ms Ashall said.

The ruling comes at a difficult time for the EU and the commission. European companies find themselves exposed to state-backed foreign takeovers given the recent drop in valuations triggered by harsh coronavirus lockdowns.

Meanwhile, Paris and Berlin, among others, have urged Brussels to allow the creation of so-called European champions after the blocked merger of France’s Alstom and Germany’s Siemens last year.

“This makes life very difficult right now,” said a person with knowledge of the commission’s thinking. “The legal bar is so high now and what the court is asking is so complex that it makes it very hard to block mergers.”

But the commission, which has two months to challenge the decision, is set to fight back with an appeal. The EU cannot afford to lose this case because consumer welfare is at stake, said a person familiar with the arguments against the merger.

“There is a real risk that we will see bad deals that will lead to poor consumer services in the next few years,” the person said, pointing to growing evidence from leading free market economists such as Thomas Philippon, that more intervention leads to healthier competition. 

Brussels is likely to argue in part that the judges misinterpreted their standard of proof on the case and that there is enough evidence to show the merger would have weakened rivals in the UK market, leading to higher prices for consumers, according to people familiar with the EU’s thinking.

EU officials are also hoping that the European Court of Justice will rule against the General Court, as it has done in other cases, the people said.

Officially, Ms Vestager has kept her options open. “We are urgently analysing the judgment,” she told journalists a day after the ruling. “There are a lot of new legal issues being raised in the judgment, and on the basis of that of course we will decide whether to appeal or not.”

Thomas Wilson, an antitrust partner at legal firm Kirkland & Ellis, warned that the General Court’s ruling might place an additional burden to both companies looking to merge, but also on the commission. 

“Given the strict legal standards established by the court,” Mr Wilson said, “the judgment will likely herald even closer scrutiny and longer review times for mergers in markets where there are only a few competitors and high barriers to entry.” 

“The judgment will also require the commission to think twice before blocking deals.”

Additional reporting by Michael Pooler in London