The two transactions have very different implications for the UK market. Merging H3G/O2 will create the UK’s largest mobile operator, whereas merging BT/EE will bring together the current leaders in the UK’s fixed and mobile telecoms markets. It remains to be seen which deals will go ahead, what structural changes will be imposed, how market shares will be impacted and how customers will react.
Mobile market share or bundled packages?
What is clear is that these mergers are driven by different strategic rationales. With the UK telecoms market one of the least integrated in Europe, BT/EE would bring together largely different, but complementary service offerings. Through a combination of EE’s superfast 4G network and BT’s leading fixed network, they will have the potential to transform the UK’s digital market through innovative bundled packages. H3G and O2, however, both remain focused on core mobile services that largely overlap. This merger signals H3G’s desire to expand its share in the mobile market through the immediate scale of network and customer base offered by O2. Joining these two organisations would create the UK’s largest mobile operator, overtaking EE and jumping to a 40% market share to EE’s 29%. In addition, there should be significant cost savings through infrastructure and back office function synergies.
Joining these two organisations would create the UK's largest mobile operator, overtaking EE's and jumping to a 40% market share to EE's 29%
The regulators point of view...
As a result, the competition authorities will be looking at both mergers very differently. The main message from the CMA’s provisional approval of the BT/EE deal at the end of October was that there are no major competition issues. H3G/O2 is unlikely to be as straight forward. The merger will see the UK move from four to three mobile operators and the EC will be concerned about the potential impact on consumers in the UK’s retail mobile market. Precedents from the EC on similar mergers in Europe are mixed. H3G/Orange in Austria, O2/E-Plus in Germany and H3G/O2 in Ireland all went ahead, but with stringent remedies. Most recently, in September 2015, Telenor/TeliaSonera in Denmark withdrew from a proposed merger after failing to agree to acceptable remedies with the EC.
Meeting the regulators conditions
Potential remedies are wide ranging as they are the regulator’s way of approving a merger with conditions. That is by forcing the parties involved to change the structure of the merger in order to compensate for any anticipated impact on consumers. The changes must be agreed by all parties before the deal can proceed, otherwise the authority can block it.
In the past, the EC has imposed remedies designed to stimulate competition from Mobile Virtual Network Operators (MVNOs). There are different types of MVNO, but at their simplest, MVNOs develop and sell their own propositions, but have wholesale arrangements in place with mobile operators, instead of investing in their own infrastructure. It is therefore relatively easy to enter the market as an MVNO because it significantly reduces the amount of capital investment required. This makes it a good way of increasing choice for consumers. As an example, Virgin Media is one of the largest MVNOs in the UK.
However, despite such remedies, markets moving from four to three operators have seen significant consumer price rises. This means the EC may be wary of clearing similar deals and are very likely to investigate new remedies in the case of H3G/O2, which could potentially be more far reaching and challenging to implement, for example asset restructuring. Whether the merger proceeds will depend on whether the parties involved are willing to accept the remedies imposed.
As we progress through 2016, provided both mergers are cleared, it will be interesting to see how the consumer market reacts. Will it herald a move to mass consumer take-up of integrated offerings of mobile, broadband, landline and TV services; or will it see continued consumer preference for specialist offerings from dedicated mobile and fixed providers?
For the last couple of years, quad play, which is where one customer takes all four services from a single provider, has been a major talking point. However, despite success in other European markets such as Spain, it has yet to take off in the UK. There are contrasting views as to whether it will ever take off and this is exemplified in the strategic approaches taken by BT/EE and H3G/O2. One view is that customers want the value offered by discounted bundles, whereas the other, is that customers approach mobile and fixed purchases differently, and therefore do not want to be tied to long contracts where all services are entwined together.
The challenges ahead...
The long term impact of the mergers in the market will depend whether the benefits are actually delivered. Parties involved in M&A activity typically face a big challenge before the merger is approved to firstly, plan the integration, and secondly, maintain business operations at the right level, all at the same time as moving through a competition assessment process that can place big demands on the business. This challenge is often exacerbated by unrest and uncertainty amongst the people involved, which grows the longer the process goes on. Subsequently, provided the merger is cleared integration plans will need to change depending on whether remedies are imposed, typically at short notice with little time to react. Then execution of any necessary structural changes becomes key to achieve Day 1, when the new organisation must deliver essential operational changes on time and ensure conformity to legal and regulatory requirements. Planning and execution is critical to reach this stage successfully and that is where independent experts can really add value, by taking the pressure off the existing organisation and providing the right skills and expertise. Ultimately, once the new organisation is operating, the challenge is to continue to manage integration delivery to ensure that benefits are driven through. In large scale transactions such as those discussed here, this will be a long process that will continue way into 2017.