Hutchison/O2 and the Commission’S Dilemma September 2020 Axon Advisory Research

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Hutchison/O2 and the Commission’S Dilemma September 2020 Axon Advisory Research | Hutchison/O2 and the Commission’s dilemma September 2020 Axon Advisory Research Hutchison/O2 and the Commission’s dilemma Mergers and Acquisitions in the ICT sector are never easy, but the recent Axon Partners Group backlash from the EU September 2020 www.axonpartnersgroup.com General Court to the European Commissions’ 2016 decision on UK Author: George Metaxas, O2/Three case may ruffle Legal & Regulatory Expert some feathers and affect future cases. Our experts explain their views in this paper. 2020© Axon Partners Group 1 | Hutchison/O2 and the Commission’s dilemma September 2020 1. Background On 11 May 2016, the European Commission blocked the proposed In 2016, the EC acquisition of Telefónica Europe (O2, one of the UK’s four MNOs) by the UK’s Hutchison 3G (or “Three”) after concluding that it would blocked the significantly impede effective competition. Hutchison challenged this acquisition of prohibition before the EU General Court – and won: on 28 May 2020, UK’s O2 by the Court annulled the Commission’s decision. The Commission has Three, but in appealed, and the case is now pending before the EU Court of Justice. 2020 the EU Four years since the Commission’s decision is a long time to resuscitate General Court this deal and the parties concerned have moved on in the meantime. annulled the Nevertheless, the implications of the General Court’s judgment – if it’s eventually upheld by the EU Court of Justice – are significant and not decision limited to telecoms consolidation. Hutchison/O2 was a 4-to-3 MNO deal, and the Commission has, in the past, approved 4-to-3 or 5-to-4 deals with only one exception, even if it has usually insisted on various remedies as a condition for clearance. The table below provides an overview. Country & Type Combined Parties Outcome year of deal market share T-Mobile & Austria Approved in Phase II, 5 to 4 30-40% tele.ring 2006 with conditions T-Mobile & Netherlands 4 to 3 40-50% Approved in Phase I Orange 2007 T-Mobile & UK Approved in Phase I, 5 to 4 30-40% Orange 2010 with conditions H3G & Austria Approved in Phase II, 4 to 3 less than 25% Orange 2013 with conditions H3G & Ireland Approved in Phase II, 4 to 3 about 40% Telefonica 2014 with conditions Telefonica & Germany Approved in Phase II, 4 to 3 30-40% E-Plus 2014 with conditions Abandoned, in light of Telia Sonera Denmark 4 to 3 more than 40% the Commission’s & Telenor 2015 competitive concerns H3G & UK Prohibition – appealed 4 to 3 more than 40% Telefonica 2016 successfully H3G & Italy Approved in Phase II, 4 to 3 30-40% Wind JV 2016 with conditions Tele2 & Netherlands 4 to 3 20-30% Approved in Phase II T-Mobile 2018 Table 1: Summary of past MNO merger decisions [Source: Axon Consulting] 2020© Axon Partners Group 2 | Hutchison/O2 and the Commission’s dilemma September 2020 This overview does not suggest any particular leniency for 4-to-3 (and The Commission even 5 to 4) mobile consolidation deals. EC approval is almost always subject to conditions, and may require massive information and has, in the past, negotiation of complex remedies in Phase II, as also recounted in detail approved 4-to-3 in the Commission’s approval decisions of hundreds of pages. or 5-to-4 deals A possible exception to the Commission’s more cautious approach was with only one arguably its clearance of Telefonica/E-Plus in Germany, whose remedies exception, even and their implementation were criticised as insufficient and led to a legal if it has usually challenge by two MVNOs before the EU General Court. Nevertheless, this insisted on attempt to annul the decision was eventually dismissed by the Court proving, once again, that while it may be possible to challenge various remedies successfully a Commission prohibition decision, it’s much more difficult as a condition for to do so against a decision approving a deal. clearance. Another somewhat controversial decision was the Commission’s clearance of H3G/Orange in Austria, which was reportedly followed by material increases in smartphone bills, suggestive of a less effective competition than prior to this 4-to-3 deal’s approval. Such, allegedly too lenient, earlier case-law may have cast its shadow over the Commission’s prohibition of H3G/Telefonica in the UK, calling for a corrective realignment with a stricter regulatory response to consolidation. The Commission based its decision on three theories of harm, all of The Commission which were rejected by the Court. All were based on alleged non- coordinated (or unilateral) effects, and thus not on an assumption that based its the notified transaction would create or strengthen an individual or decision on three collective dominant position. Instead, the non-coordinated affects theories of harm, doctrine allows the Commission to block any notified “concentration” all of which were (merger, acquisition or certain JVs) which (i) eliminates important rejected by the competitive constraints in an oligopolistic market, and (ii) reduces competitive pressure on the remaining competitors. The conditions Court proving the existence of unilateral effects in such so-called non-collusive oligopolies or “gap cases” had not been examined in such detail by the European Courts prior to this decision. In its criticism of the Commission’s reasoning and conclusions, the Court has now set out important guiding principles and standards for similar merger review cases, if they can survive the Commission’s pending appeal. Among other statements, the Court has argued that: 2020© Axon Partners Group 3 | Hutchison/O2 and the Commission’s dilemma September 2020 The mere effect of reducing competitive pressure on the remaining competitors is not, in principle, sufficient in itself to demonstrate a significant impediment to effective competition through non-coordinated effects. (Indeed, it can be argued that any merger “reduces competitive pressure on the remaining competitors”, at least to some limited extent.) The more a theory of harm is complex or uncertain, or stems from a difficult to establish cause-and-effect relationship, the more demanding EU courts should be regarding the sufficiency of the Commission’s supporting evidence. The Commission should ground its analysis on the economic outcome “most likely to ensue” from the notified concentration. On that basis, it should then demonstrate that any scenarios and theories of harm it wants to invoke to block the transaction are “sufficiently realistic and plausible”; they cannot be just theoretically conceivable. While the required standard of proof in such cases does not need to be “beyond all reasonable doubt”, it should be at least “more likely than not”. 2020© Axon Partners Group 4 | Hutchison/O2 and the Commission’s dilemma September 2020 2. The Commission’s three theories of harm and their rejection by the Court First, the Commission argued that the expected sharp reduction in The Court held competition post-merger would probably have led to an increase in retail prices for mobile telephony services in the UK and a restriction of choice that the for consumers. The Court held that the Commission was wrong to Commission was conclude that a mere decline in competitive pressure post-merger, from wrong to the loss of a market player who had more influence on competition than conclude that a its market share would suggest, was sufficient to prove a significant mere decline in impediment to effective competition. Such an interpretation would lower the standard of proof to an unacceptable level. Instead, the “important competitive competitive force” to be removed should really stand out from its pressure post- competitors in terms of impact on competition. merger was The Court further held that the mere growth in the share of new sufficient to customers won, over several consecutive years, by the smallest MNO in prove a an oligopolistic market (in this case: Hutchison’s Three), does not, in significant itself, constitute sufficient evidence of that operator’s power on the impediment to market or of the elimination of the important competitive constraints that the parties to the notified transaction. Similarly, the mere fact that effective Three’s offer was cheaper for some and not for all market segments was competition not sufficient to demonstrate that it was an “important competitive force”; to achieve this status, Three’s pricing policy should be capable of significantly changing competitive dynamics. Finally, the Court disputed the Commission’s reasoning that, since Three had historically played a disruptive role through its aggressive pricing policy, it was bound to continue this role and policy in the future. Second, according to the Commission, the transaction would also likely The Court have a negative influence on the quality of services to UK customers, undermining the development of mobile network infrastructure. This questioned theory was based on a particularity of the UK market: The two parties whether EC’s concerned had separate passive and active network-sharing agreements assumptions with each of the two other MNOs: BT/EE and Three through their MBNL were reasonably joint venture, and Vodafone and O2 through their so-called “Beacon” certain and agreements. The Commission argued, therefore, that post-merger, the new entity would be party to both network-sharing agreements and material would cease to be committed to one or both of these agreements. This 2020© Axon Partners Group 5 | Hutchison/O2 and the Commission’s dilemma September 2020 would lead to negative effects on quality and further infrastructure The Court development. disagreed that The Court questioned whether these assumptions were reasonably the elimination of certain and material, arguing as follows: this MNO as an If one were to follow the Commission’s view, this would justify the independent future prohibition of any 4-to-3 concentration, other than those effected between partners to network-sharing agreements.
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