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Will Telefonica-Hutchison Merger in UK See the Light of Day?

U.K. wireless giant Hutchison Whampoa, which is currently operating under the 3UK brand in the nation, has decided to give additional concession to small-sized wireless operators in order to secure regulatory approval for its proposed merger with Spanish telecom behemoth Telefonica SA TEF-controlled O2.

Notably, in Mar 2015, Telefonica had decided to 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 lobby the European Union Competition Commission (EC), expressing concerns regarding the proposed merger deal in the country and its possible consequences.

In Sep 2015, 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. The EC has set April 22, 2016, as a provisional deadline for deciding whether or not to approve the deal.

The latest concessions from 3UK include network capacity offered to small-sized wireless operators in the U.K. such as Sky and Virgin Mobile. 3UK 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. Ofcom estimated that the combined entity once formed, will command more than 40% share of the U.K. wireless market. In such a scenario, the price of wireless services may go up by 10% to 20%, with only three major operators ruling the game as against the current market scenario of four players.

Ofcom also stated that even if the EC asks the combined entity to divest some parts of its total spectrum, it will not be easy for a new operator to enter the market as establishment of new wireless network requires a long gestation period and considerable investments. The telecom industry is generally characterized as having high barriers to entry.

Over the last couple of years, the UK telecom sector has been witnessing a wave of consolidations. Introduction of latest network technologies has significantly intensified competition in this market. In order to attain economies of scale to 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 are 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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