Photographer: Simon Dawson/Bloomberg

European Mobile Carriers Blocked at Altar Hunt for New Partners

  • EU, government opposition dooms deals in several countries
  • Tough competition has networks looking elsewhere for growth

The prospect of three failed attempts within months to consolidate European wireless-phone markets has carriers looking beyond national borders and even outside the industry to find relief from cutthroat mobile competition.

After months of deliberation, the European Union is poised to take the final step of blocking the planned merger of the U.K. mobile-phone units of CK Hutchison Holdings Ltd. and Telefonica SA. A veto would be the latest blow to consolidation inside some of the region’s toughest countries. Pressure from EU regulators led to the scrapping of a Danish deal in September. Last month the French government helped doom a transaction that would have absorbed one of the country’s four players.

The European Commission declined to comment on the U.K. deal, beyond saying it has a May 19 final deadline for a ruling. The commission is discussing a merger Tuesday, it said on its website without identifying the transaction.

While another so-called four-to-three deal is still pending in Italy, EU Competition Commissioner Margrethe Vestager is preparing to make formal objections to the plan to combine mobile units of Hutchison and VimpelCom Ltd., people familiar with the matter said last month.

“It’s reasonable to infer that the commission is saying ‘don’t bother,’ ” said David Cantor, a lawyer at Telecommunications Law & Strategy in Brussels.

Phone operators are drawing the same conclusion. They say too much competition in a market limits the profits needed to invest in upgraded networks. They’re cutting spending on wireless infrastructure, trimming sales at providers such as Nokia Oyj. 

With home markets mostly stagnant, European carriers have been forced to consider new plans to ignite growth and pad profits -- cross-border deals, investments in faster-growing regions, tie-ups with television companies and ventures into new fields like banking. In their domestic markets, they’re seeking to create bundled offerings that package telephony and entertainment.

“Even if there isn’t four-to-three consolidation, the opportunities for other players -- fixed players -- to combine with one of the mobile operators will continue,” said Gavin Patterson, chief executive officer of one of those fixed-line operators, BT Group Plc, which recently acquired mobile network EE in the U.K.

Orange SA, whose bid to buy rival French mobile operator Bouygues Telecom failed, is moving to strengthen its presence in Africa, which is outpacing its European operations in revenue and earnings growth. It’s also adding mobile-banking apps to attract millennials and keep customers tied to its phone service. Vodafone Group Plc is preparing for an initial public stock offering of its mobile business in India.

Others, like Altice NV, which owns Numericable-SFR in France, are facing the challenge of integrating acquisitions. After snapping up mobile operator SFR in 2014 and combining it with its Numericable subsidiary, Altice last year acquired a controlling stake in Suddenlink Communications of the U.S., followed by a pending deal for Cablevision Systems Corp.

Reducing a 49.9 billion-euro ($57 billion) debt pile is high on Telefonica’s do-list, if Vestager blocks the roughly 10 billion-pound ($14.5 billion) sale of its U.K.-based O2 unit. New CEO Jose Maria Alvarez-Pallete wants to charge the company’s biggest data hogs more for their wireless plans. The company could also do smaller deals. Selling its 2.5 percent stake in China Unicom Hong Kong Ltd. could bring in $700 million, and there’s about a $300 million holding in a Spanish bank, Banco Bilbao Vizcaya Argentaria SA. A sale to a different buyer or an initial public offering of O2 are also on the table, people familiar with the situation have said.

Liberty Global Plc, owner of U.K. cable-TV company Virgin Media, would look at O2 if the merger with Hutchison were blocked, Liberty CEO Mike Fries said on an earnings call Tuesday.

Telefonica has “exceptionally strong assets” in the U.K., O2 Chief Executive Officer Ronan Dunne said last week. But he also called for a regulatory overhaul to facilitate consolidation. Alvarez-Pallete said Tuesday that the company has plans ready if the EU blocks the unit’s sale.

Thwarted Plans

The deal landscape has gotten tougher. Before Vestager’s tenure, regulators waved through transactions that reduced the number of mobile operators in Germany, Austria and Ireland to three. But most European markets still have four or more. Vestager signaled the commission’s changing priorities last year, even before she blocked the union of the Danish businesses of Telia AB and Telenor ASA.

“Ensuring that markets are competitive is key both to spur much-needed innovation and investment in European telecoms markets, as well as to offer affordable prices to consumers,” Vestager said in April 2015. “The risk is that consumers, be it corporate or citizens, get fewer options and higher prices.”

While frowning on consolidation within markets, regulators have looked more favorably on cross-border deals or on combinations with other telecom sectors. These have included BT’s acquisition of EE, Orange’s purchase of Spanish broadband provider Jazztel and the combination of French broadband provider Numericable and mobile operator SFR. A pending deal would bring together the mobile operations of Vodafone Group Plc and Liberty Global’s broadband operations in the Netherlands.

“If four-to-three deals are off the agenda, then for operators that are struggling with scale and declining margins, the obvious thing to look at is the deals that have gotten through,” said Phil Kendall, an analyst at Strategy Analytics.

Regulators were criticized for approving a deal in Austria that was initially followed by price increases, although prices did eventually fall when smaller virtual rivals started selling phone services. Vestager says she’s reviewing deals case-by-case, without a preferred number of operators per market, but analysts say her actions are sending a different message.

In Italy, for example, the commission wanted Hutchison and VimpelCom to ensure the creation of a new wireless network. That’s a high hurdle in a market that’s as competitive and slow-growing as Italy.

“Without big-picture consolidation, the growth angle for incumbent telcos is harder to define,” said Alex DeGroote, an analyst at Peel Hunt in London.

While consumers are opting for the convenience of bundled telecommunications, deals to bring together operators of different services have been tricky. Before getting together in the Netherlands, for example, Liberty and Vodafone failed to agree on a broader combination of their businesses, according to people familiar with the situation.

U.K. pay-TV provider Virgin Media, already offers wireless services by renting space on EE’s network, and rival Sky Plc is aiming to do the same via O2. That means owning mobile infrastructure isn’t critical to their business models, said Neil Campling, a media analyst at Northern Trust Securities in London.

“We’ve known for some time that this O2/Hutchison deal is dead in the water,’’ he said. “If there was something of an opportunity to bring Sky or Virgin Media to get it over the finish line it would have already happened.’’

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