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Telefonica's O2 & Hutchison Merger Faces Roadblock in UK

The proposed merger deal between U.K. wireless giant Hutchison Whampoa, which is currently operating under the 3 UK brand and Spanish telecom behemoth Telefonica SA TEF controlled O2 is again facing serious regulatory threat. The deal is currently under review by the European Union Competition Commission (EC), which has set April 22, 2016, as a provisional deadline for deciding whether or not to approve the merger.

Notably, in Mar 2015, Telefonica had decided to divest its O2 brand to Hutchison Whampoa controlled 3 UK. The total consideration of the merger is GBP 10.25 billion (approximately $15.25 billion). In Feb 2016, the communications regulator in the U.K. -- Ofcom – attempted to influence the EC against the proposed merger deal in the country and warned of its possible consequences.

Last September, Hutchison Whampoa informed the EC about its proposed takeover of O2. Soon after, in October, Ofcom submitted a request asking the EC to refer all or part of the deal for assessment to it. In the same month, the EC opened an in-depth investigation into the proposed merger deal. In Dec 2015, the EC rejected Ofcom’s plea to take over the evaluation of the Telefonica-Hutchison merger deal, despite its claim of understanding the domestic market better.

On Apr 11, 2016, UK's Competition and Markets Authority (CMA) expressed serious concerns about the proposed merger deal and urged the EC to stop it as the deal is likely to raise prices of wireless services in the nation and it may also reduce the quality of services offered by carriers. Importantly, the UK will go for a referendum on Jun 23, 2016, on whether the country should exit the EU.

Meanwhile, Hutchison Whampoa has decided to give additional concession to small-sized wireless operators in order to secure regulatory approval for its proposed deal. The latest concessions from 3 UK include network capacity offered to small-sized wireless operators in the U.K. such as Sky and Virgin Mobile. 3 UK has proposed allotting 20% of its existing network capacity to Sky – which would be a new entrant in the mobile space – and 10% of the combined network’s capacity to Virgin Mobile.

At present, the UK wireless market is dominated by four large players. Apart from O2, 3UK, and Vodafone Group Plc. VOD, BT Group Plc. BT has emerged as a key player in the space after its acquisition of British mobile network operator EE, which was earlier jointly controlled by Orange SA ORAN and Deutsche Telekom AG.

At present, O2 serves over 22 million customers. Post merger, the combined entity, with a consolidated subscriber base of more than 30 million, will form the largest wireless operator in the U.K.

Over the last couple of years, the UK telecom sector has been witnessing a wave of consolidations. Introduction of the latest network technologies has significantly intensified competition in this market. In order to attain economies of scale and remain competitive, several telecom companies are looking for merger options in a bid to offer competent quad-play services of wireless, wireline, Internet and video services.

However, a trade-off between achieving scale economies and continuation of competitive prices is of utmost importance. It remains to be seen how the EC will tackle this problem with respect to the impending Telefonica-Hutchison merger deal. 

Telefonica currently carries a Zacks Rank #3 (Hold).

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TELEFONICA S.A. (TEF): Free Stock Analysis Report
BT GRP PLC-ADR (BT): Free Stock Analysis Report
VODAFONE GP PLC (VOD): Free Stock Analysis Report
ORANGE-ADR (ORAN): Free Stock Analysis Report
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