Li Ka-Shing's British Disconnection
Europe's antitrust cop Margarethe Vestager has moved the goalposts. Telecoms, cable and pay-TV bosses in Britain will have to revisit M&A strategies. Expect new attempted pairings to emerge and for BT to be the short-term winner.
After nearly a year of debate, the 10.25 billion pound ($14.5 billion) effort by Li Ka-Shing's Hutchison to buy Telefonica's 02 has failed to win over Vestager and is expected to be rejected within weeks, Bloomberg News reports.
That's despite Hutchison concessions that arguably went further than those approved by the EU in earlier deals in Germany, Austria, and Ireland. It agreed to rent out 40 percent of the combined operator's network capacity to Rupert Murdoch's Sky and John Malone's Virgin Media, and to host grocer Tesco's mobile venture.
It wasn't enough for Vestager, who appears to have broken from her predecessor in deciding mobile virtual network operators (MVNOs) -- the ones renting the capacity -- don't guarantee healthy competition. The argument runs that they'll always be constrained on prices they can offer consumers by the terms of the rental agreement.
From the point of view of Hutchison's Three, though, offering too much more would sap the interest in doing the consolidation at all. The point of these so-called "market repair" deals is to lessen pricing pressure by taking a competitor out of the mix (Hutchison also lacked scale). Agreeing a remedy that goes beyond renting capacity and which creates a new rival defeats the object.
Plus Hutchison says no company in Britain wants to be a new mobile network operator because of the cost. They have a point. For example, Sky's strength is pay-TV while mobile is an add-on, so it would prefer not to spend billions on a network. It would rather rent, explaining why it backed Hutchison's deal.
Sky will now -- reluctantly -- have to study whether it should indeed buy a mobile network, since that would side-step Vestager's painful scrutiny. It could always bid for O2 itself, though probably not at the same price as Hutchison because of a relative lack of synergies. Analysts estimate Sky could offer 9 billion pounds by loading up on debt and issuing 10 percent of the price in new equity.
Such a move would be a big strategic change for Sky, though. The Murdochs have long been wary of the investment needed in telecoms.
Looking at Hutchison, it could switch attention to broadband provider TalkTalk, with a 3 billion pounds enterprise value, or even sell to TalkTalk if it decides to give up on Britain. But buying TalkTalk wouldn't get round the problem that Hutchison is simply too small in U.K. mobile to compete effectively with leaders BT and Vodafone.
You'd expect Vodafone to be a winner from a failed Three-O2 deal, given that boss Vittorio Colao was such a vocal opponent. While it's true that it won't face a bigger, tougher competitor in Three -- and has more options in any future round of deals -- it still has to address its short-comings in broadband and pay-TV at a time of convergence.
So the person with most reason to crow today is BT boss Gavin Patterson. He's already squeezed through his deal to buy EE (bringing together Britain's biggest fixed-line and mobile operators by sales). He'll be able to start the convergence trend in Britain on his own terms, while his competitors cope with the disarray left by Vestager.
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