Leila Abboud is a Bloomberg Gadfly columnist covering technology. She previously worked for Reuters and the Wall Street Journal.

(Updated )

If billionaire Li Ka-Shing wants to save his Italian mobile phone merger, he's going to have to dig much deeper than he did in Britain to win over regulators.

The attempt by Li's Hutchison to buy Telefonica's O2 in the U.K. was thwarted today by Brussels trust-buster Margrethe Vestager. It confirms a definitive hardening in Europe on allowing national markets to go from four to three mobile operators.

The fear is that the U.K. "no" will automatically mean a "no" for Hutchison's merger with Vimpelcom's Wind in Italy, another "four-to-three" deal. While that's not yet a certainty, it will be a slog to get a deal through if Britain's anything to go by.

Regulatory Risk
Investors have marked down Hutchison as its European M&A push hit regulatory opposition
Source: Bloomberg

In the new reality of European telecoms, the only likely way to clinch the Italian merger would be to preserve the status quo by inviting in a new competitor that owns infrastructure and doesn't rely on renting capacity. Li and Vimpelcom's Mikhail Fridman, who'd share power in the Italian joint venture, must decide whether that's palatable.

The reasoning behind a spate of mobile deals in Europe is that taking a competitor out of the market lessens price pressure, cuts cost and frees investment capital. Offering concessions (known as remedies) that create a new rival undermines the logic. If Li and Fridman decide that means the economic rationale no longer holds, better to give up now than waste a year in regulatory purgatory.

There are, however, differences between Britain and Italy that may offer hope. The most important is politics. Italy's government and regulators may be less hostile than their Brit counterparts, who lobbied loudly against Hutchison's deal. Remember, Angela Merkel helped force through German mobile consolidation despite opposition from EU technocrats.

Yet Li and Fridman can't ignore Vestager's view that competition isn't guaranteed by so-called "mobile virtual network operators," which rent capacity. Instead, she'll want to see a new player with its own spectrum and part of a network. Her aim is to ensure there's a post-consolidation "maverick" -- an operator aggressive enough on price to prevent a cartel forming.

It's Hutchison's apparent failure to provide this safeguard in the U.K. that explains the deal's failure. Unless Li learns from that, he'll have the same unhappy experience in Italy. 

Although the full decision in which Vestager explains the U.K. rejection won't be public for a while, we can guess at what Hutchison and Wind need to do to placate her:

  1. Sell some spectrum to a credible new player.
  2. Sell Hutchison's Italian mobile network to the new entrant. Failing that, sell them at least part of the network paired with a generous roaming contract.
  3. Don't demand such a high price that the few potential buyers end up balking.

The problem is, this may well erode the deal's attractiveness by cutting its 5 billion euros ($5.7 billion) in expected savings. Yes, it's unfair given that similar four-to-three deals went ahead pre-Vestager. None of that really matters.

Li and Fridman need to assess whether a less favorable deal is better than none. Without it, Hutchison is mired in last place in Italy with 8 percent market share, while Wind has 24 percent, according to Morgan Stanley. A combined company (before remedies) would have about 47 percent of Italy's mobile spectrum, while serving 34 percent of subscribers, according to Bloomberg Intelligence's Erhan Gurses. Both would struggle without a tie-up to match the higher-quality mobile broadband offered by Telecom Italia and Vodafone.

Italian Game
If approved, Hutchison and Wind's merger would create three similar sized groups (at least pre-remedies)
Source: Morgan Stanley
Market share calculated as average between subscribers, mobile revenue, and EBITDA market share

And if Hutchison and Wind are smart, maybe they can make the sums work. The joint venture means neither's paying a premium, which may allow wriggle room on remedies.

French billionaire Xavier Niel is waiting for their call. He discussed remedies in Britain with Hutchison but couldn't reach a deal. If they're afraid of letting the fearsome price-cutter onto their turf, there's always Swisscom. It owns Italian broadband operator Fastweb, which wants to expand in mobile.

Hutchison has made its disgust with Vestager's position pretty obvious, and has threatened to sue to appeal the British decision. A more tempered approach is needed in Italy.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

(Updated to reflect EU's rejection of Hutchison/O2 deal)

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Leila Abboud in Paris at

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James Boxell at