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European Commission Approves Merger of Second and Fourth Largest Irish Wireless Carriers

On May 28, 2014, the European Commission approved the acquisition of the second largest mobile telecommunications carrier in Ireland by the fourth largest provider.  The US$1 billion merger of O2 Ireland and H3G (known as Three), which had been awaiting regulatory approval since October 2013, will result in a new entity with a 37.5% market share, only slightly less than the 40% share held by the dominant carrier, Vodafone.  The remaining wireless provider in what will now be a three player market, Eircom, will have an approximately 20% share of the Irish market.

In conducting its initial review of the proposed merger, the European regulator expressed concerns that the acquisition of O2 by Three could substantially dampen competition in the Irish retail mobile telephony market by weakening the incentive of the newly merged entity to exert significant competitive pressure on the remaining wireless carriers.  In addition, the Commission investigated the possibility that the transaction could significantly reduce the number of mobile network operators (MNOs) willing to provide wholesale network access on commercially reasonable terms to non-facilities based mobile virtual network operators (MVNOs).  Finally, the Commission questioned whether reducing the number of Irish MNOs from four to three could harm consumers by increasing the possibility of coordinated price increases.

Three was the newest entrant in the Irish market and the European Commission noted that it had the highest incentive to grow its subscriber base through attractive pricing and “all you can eat” data plans.  In support of the transaction, Three had countered that the Irish market for wireless services was dominated by one carrier, and that absent the acquisition, it would be impossible for any provider to achieve sufficient scale to narrow this gap.

Ultimately, the Commission determined that two commitments offered by the new entity would ensure the future competitiveness of the Irish wireless market.  First, Three pledged that it would sell up to 30% of the merged company’s network capacity to two new entrant MVNOs.  Rather than providing “pay-as-you-go” access for these providers, Three guaranteed that the MVNOs would receive a dedicated “pipe” in the merged entity’s network that would support voice and data traffic.  Three also pledged to divest five blocks of spectrum in the 900 MHz, 1800 MHz, and 2100 MHz bands, which could allow the MVNOs to become full mobile network operators in the future.  The European regulator found that this commitment would allow the recipient MVNOs to assume the role of disruptive competitor that had been formerly filled by Three.

Second, Three agreed to continue O2’s existing network sharing agreement with Eircom, the third largest remaining wireless carrier, on improved terms.  The European Commission found that this agreement addressed its concern that Eircom could otherwise be priced out of critical network sharing arrangements.  With this commitment, the European Commission felt reassured that Eircom could achieve its goals for 4G LTE deployment, and remain an important competitive force in the wireless market.  The regulator felt that both of Three’s commitments, taken together, were sufficient to reduce the likelihood that consumer prices would increase as a result of the merger.

The acquisition of O2 by Three is not the only major wireless merger under consideration by the E.U. regulator this year.  The European Commission is expected to make a decision by July 10, 2014 on the US$11.7 billion proposed acquisition of E-Plus of Germany by Telefonica Deutschland.  If approved by the regulator, this deal would also reduce the German mobile telecommunications market from four to three players.  In a notable development, German chancellor Angela Merkel has voiced her support for the European Commission to enable consolidation among mobile operators.  The presumptive front runner for the 2014 appointment of a new European Commission president, Jean-Claude Juncker, has also expressed his belief that the regulator should adopt revised competition rules that would encourage mergers and acquisitions, including in the telecom sector.

The opportunity for regulators to weigh the benefits of telecommunications mergers shows no sign of slowing down.  According to analysts’ reports, the European telecom sector is having its busiest year for mergers since 2000, while deals in the industry globally are up 141% in 2014.  As the European Commission has observed, in Europe, as in the United States, steady increases in consumer use of wireless broadband is placing a strain on mobile networks, and many telecommunications operators argue that the only way to meet consumer demand with faster and more robust 4G LTE networks is by acquiring scale through industry consolidation.   Another factor driving consolidation is low retail mobile prices driven by cut-throat competition in some markets.  Worried about job layoffs, French Minister Arnaud Montebourg recently complained that regulators and competition authorities had created too much competition in the French mobile market.  He said that the state should step in to facilitate agreements between MNOs.