Insights

Major Shake-Up of EU Merger Assessments in Store after EU Court Overturns European Commission's Prohibition of Hutchison/O2 Merger

Firm Thought Leadership

In what is destined to rank as one of the most significant judicial knockbacks of the European Commission (“Commission”) in the area of merger control for many years, the EU’s General Court (“Court”) has annulled the decision by the Commission in 2016 to prohibit the merger between two of four UK mobile network operators (“MNOs”) – CK Hutchison’s Three and Telefonica’s O2 UK.  The Court’s judgment, delivered on 28 May, finds errors in how the Commission attempted to substantiate alleged anticompetitive effects of the merger and is decidedly critical of the way in which the Commission conducted its merger review.  While this judgment, coming as it does almost four years after the original prohibition decision, does not enable the Hutchison/O2 merger to proceed in a market that has since moved on, it could herald important changes to the way in which the Commission assesses mergers in oligopolistic markets.  The ramifications could be important not only for MNOs and other players in the mobile sector, but for any companies currently engaged in or contemplating mergers in oligopolistic markets.

The 2016 Commission decision

The Commission blocked Hutchison’s proposed merger of its Three network with O2 on the grounds of alleged “non-coordinated” effects (also known as unilateral effects, where the merged entity is able to unilaterally exercise market power) on the UK’s retail and wholesale telecoms markets.  On the retail market, the Commission had found that the merged company’s projected 40% share would enable it to unilaterally exercise market power to raise prices, or reduce the quality of telecoms services.  On the wholesale market – with MNOs such as Hutchison’s Three hosting services for mobile virtual network operators (“MVNOs”) – the Commission found that Three was an important competitive force, the loss of which would lead to anticompetitive, non-coordinated effects in a highly-concentrated market.  The Commission also concluded that the transaction would raise serious concerns in respect of complex network infrastructure-sharing agreements: future investment in UK telecoms infrastructure that was managed via two such agreements (one between Three and EE and the other between O2 and Vodafone) would inevitably suffer as a result of the transaction, according to the Commission.

The Court’s judgment

First judgment concerning application of Commission’s non-coordinated effects doctrine

Having been focused previously on transactions which led to the creation or strengthening of a dominant position, the EU Merger Regulation was extended in 2004 in order to cover mergers which did not create or strengthen a dominant position, but nonetheless could lead to a lessening of competition in an oligopolistic market.  The test under EU law therefore became whether a merger would lead to a significant impediment to effective competition (“SIEC”), rather than whether a deal would enable merging companies to strengthen or build a dominant position to the detriment of competition.

The Commission’s prohibition of the Hutchison/O2 merger had relied heavily on a particular interpretation of the non-coordinated effects theory of harm, focusing in particular on the loss of the competitive constraint posed by Three in the highly concentrated UK retail and wholesale mobile services markets.  In its judgment, the Court found that the Commission did not demonstrate with sufficiently credible evidence that the merger would result in the elimination of an important competitive constraint; the Court found that the Commission had confused the SIEC test, the concept of the elimination of an important competitive constraint and the elimination of an important competitive force.  The Court noted in particular that, were the Commission to continue to follow the approach it took in its assessment of the Hutchison/O2 merger, it could prohibit any horizontal merger in an oligopolistic market since the elimination of a competitive force would be treated automatically as the elimination of a competitive constraint, justifying a finding of an SIEC.

Specific criticisms of Commission’s merger assessment

On the substance of the case, the Court found fault with the Commission’s original analysis in multiple respects.  It found that the Commission had not substantiated its competitive effects assessment in relation to (i) the retail market, (ii) the network sharing arrangements, and (iii) the wholesale market.

  • In the retail market, the Court found that the Commission had not established that Three was an important competitive force in the market or a close competitor of O2 and that the Commission’s supporting econometric analysis “lacks probative value” (the judgment discusses the Commission’s analysis on these points in considerable detail).
  • As regards the network sharing arrangements, the Commission had expressed serious concerns that the presence of the merged entity in the two main network sharing agreements in place in the UK (one such agreement was between EE and Three, while the other was between Vodafone and O2), would result inevitably in a reduction in incentives for the other parties to those agreements to invest in future network roll-outs.The Court rejected the Commission’s findings in this respect, and found that there was no solid basis for the Commission’s claim that a disruption to operators’ alignment of interests in the network sharing agreements could harm competition.
  • In the wholesale market, the Court was dismissive of the Commission’s assessment.  It essentially found that while Three was a credible competitor in supplying MVNOs and other providers in the wholesale market, influencing competition even when it did not win bids, this was not sufficient to classify Three as an ‘important competitive force’.  Moreover, Three and O2 did not exert upon each other important competitive constraints that would be eliminated post-merger.

Analysis

Impact in the telecoms sector

Since the appointment of Margrethe Vestager as EU Competition Commissioner in 2014, the Commission has been remarkably steadfast in its opposition to mobile services mergers which would result in consolidation of national markets from four MNOs to three.  Hutchison itself was involved in one such decision when, in 2016, Hutchison and its proposed joint venture partner Wind Tre, made substantial divestments of spectrum and infrastructure assets in Italy, in order to address the Commission’s concerns that a fourth operator would disappear from the Italian market.  Other attempted mergers, such as Denmark’s TeliaSonera’s attempted acquisition of Telenor’s Danish mobile operations in 2014/2015, have been stopped in their tracks (in TeliaSonera’s case abandoned) in the face of the strength of Commission opposition. 

For MNOs and MVNOs, this judgment has some important implications.  The Court specifies in its judgment that, when reviewing telecoms mergers, the Commission must conduct a “dynamic prospective analysis”, taking into account any coordinated or unilateral effects over a relatively long period of time into the future. The Court also examined specifically the Commission’s analysis of the impact of the merger on network sharing agreements in the UK, finding that the Commission did not properly analyse the positive correlation between market consolidation and investment, which could lead to better-resourced networks. 

MNOs and other providers will study the judgment closely and it can be expected that MNOs in Europe may feel emboldened to pursue further consolidation in national markets, particularly where there is strong evidence of the potential for increased investment in network infrastructure as a result of a proposed merger.  The Court’s judgment comes at a time when further consolidation of the UK telecoms sector has been announced: Liberty Global and Telefonica, who plan to merge the former’s broadband, cable and MVNO in the UK (Virgin Media) with the latter’s O2 network, will be studying the Court’s judgment for any encouragement or reassurance in respect of the antitrust aspects of their transaction.

The Commission has stated that it is considering the implications of the Court’s judgment “urgently”, and it has up to two months from the date of the judgment to launch an appeal at the Court of Justice, against the General Court’s ruling.  Given the constraints that the judgment places on the Commission’s room to manoeuvre in assessing mergers in oligopolistic markets, it may be expected that the Commission will give serious consideration to appealing.  Nonetheless, there is at a bare minimum a window of at least a year during which the Court’s ruling on these matters will stand – a window of opportunity that incumbent MNOs may not let slip. 

Impact more broadly

The Court’s judgment represents in many ways a recalibration of the Commission’s current approach to determining what constitutes an SIEC.  The Court has clarified that there must be a “strong probability” of harm as a result of a transaction, and the Commission is not entitled to label automatically all operators in a concentrated market as “important”; rather, the player that is being removed from the market as a result of the merger must “stand out” as posing a significant competitive constraint (not just having been a competitive force) in the market.  The standard of proof that the Commission must satisfy in order to demonstrate that a player is sufficiently important has been raised substantially.

The judgment in all likelihood makes it more difficult for the Commission to prohibit mergers – or to extract significant remedies from merging parties – in oligopolistic markets, in the absence of clear evidence of harm to competition as a result of the transaction.  The judgment effectively curtails the Commission’s discretion in these types of cases, and confirms the importance of a full and rigorous analysis of the effects on competition of a transaction, building on recent case law from the Court of Justice which has increasingly stressed the importance of comprehensive, robust effects analyses.  Commission case teams handling what are already complex merger investigations in oligopolistic markets face the challenge of meeting this new, higher threshold when trying to prove that a merger is likely to lead to the removal of an important competitive constraint in a market.

In the immediate term, parties to appeals against Commission prohibition decisions may take heart: ThyssenKrupp, currently engaged in an appeal against the Commission’s prohibition of its proposed joint venture with Tata Steel last year, will be particularly interested in the impact of this judgment given that part of its appeal alleges a wrongful application of the SIEC test.

In a wider context, companies contemplating mergers in concentrated markets should evaluate the positive implications the judgment may have for what may otherwise have seemed a daunting regulatory landscape.  The judgment in this case does not represent a panacea for all possible mergers in concentrated markets which would otherwise have faced real antitrust problems.  The judgment does, however, indicate that merging parties have real scope to advocate the approval of such mergers where there is no robust and unambiguous evidence that the transaction will result in the removal of an important competitive constraint.

Cross-border realignment?

In its judgment, the Court noted that the Commission’s interpretation of what constitutes an “important competitive force” has been out of line with what the Court understood to be the approach taken in the United States and the UK.  To the extent that this judgment represents a realignment of the EU approach, whether bringing it closer to the U.S. and UK positions or otherwise, companies planning ambitious cross-border transactions in concentrated markets should be particularly mindful of any changes they need to consider in their merger advocacy strategy.  Pooling of resources spent and efforts made in preparing an antitrust strategy across multiple jurisdictions is an attractive prospect, but careful calibration of the arguments made before different authorities will continue to be essential.

 

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