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Is Telefonica's O2 and 3UK Merger on the Verge of Collapse?

According to a recent Bloomberg report, the proposed merger deal between U.K. wireless giant Hutchison Whampoa, which is currently operating under the 3UK brand and Spanish telecom behemoth Telefonica SA TEF controlled O2 is likely to be vetoed by the European Union Competition Commission (EC). The EC has set May 19, 2016, as the deadline to issue a final ruling regarding this merger deal. However, as per Bloomberg, the EU regulator may make an announcement by the end of this month.

Notably, in Mar 2015, Telefonica announced that it will divest its O2 brand to Hutchison Whampoa controlled 3UK. 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 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 transaction 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 the carriers. Importantly, the UK will go for a referendum on Jun 23, 2016, on whether the country should exit the EU.

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.

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.

Currently, O2 serves over 22 million customers. If approved, the combined entity, with a consolidated subscriber base of more than 30 million, will form the largest wireless operator in the U.K. Bloomberg reported that the EC is not convinced at all about the concessions offered by Hutchison Whampoa.

In line with the CMA, the EC also wants Hutchison Whampoa to offer to sell a chunk of the merged entity's network infrastructure to a new competitor. Meanwhile, The Telegraph reported that Hutchison Whampoa has decided to challenge the EC’s decision legally if the regulator gives a negative verdict on the deal.

Telefonica currently carries a Zacks Rank #2 (Buy).

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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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