Following an in-depth investigation, the Competition and Markets Authority (CMA) has cleared the £31 billion mergers between Telefonica’s O2 and Liberty Global’s Virgin Media. There is no doubt that the new telecommunications giant will shake up the market and the agreement has not come without concerns about the impact on consumers.
However, CMA panel inquiry chair, Martin Coleman, ensures “a thorough analysis of the evidence gathered during our phase 2 investigation has shown that the deal is unlikely to lead to higher prices or a reduced quality of mobile services – meaning customers should continue to benefit from strong competition.”
When a merger is expected to have the effect of a substantial lessening of competition, the CMA may propose a remedy that they deem effective. There are two types of remedies: behavioural remedies – set constraints on the merged firms’ property rights by implementing contractual agreements to abuse certain assets; structural remedies aim to maintain or restore the structure of the market and consist of prohibition, the removal of links between competitors and most commonly divestiture.
However, in this case, the deal has been approved without the imposition of any remedies.
Synergies
The two companies are aiming to deliver £6.3 billion in synergies by the fifth year after closing, the majority of which will come from lower costs and capital expenditure. By integrating and cross-selling broadband, phone, mobile and TV services, revenue is expected to increase by £110 million (annual rate). However, it is important to note that an initial £700 million will need to be spent to achieve these targets.
Efficiency gains from the merger seem to be large, and the increased synergies can help facilitate the merged companies’ plans, giving consumers more choice and value.
In a joint statement, Mike Fries, CEO of Liberty Global, and José Maria Alvarez-Pallete, CEO of Telefonica, said: “This is a watershed moment in the history of telecommunications in the UK as we are now cleared to bring real choice where it hasn’t existed before while investing in fibre and 5G that the UK needs to thrive…Lutz and Patricia are now set to take the reins and launch a national connectivity champion that will connect more people, ignite more businesses back to growth and power more communities for the greater good.”
Impact on the wholesale services provided by O2 and Virgin Media
A major concern of the CMA was the possible impact on the wholesale services provided by both companies. However, it was concluded that for several reasons the new firm is very likely to remain competitive.
Initial concern over the merged entity was that it could “withhold or deteriorate its supply of wholesale mobile services to rival MVNOs.”
O2 supplies mobile virtual network operators (MVNOs) such as Giffgaff, Sky Mobile and Tesco mobile its network infrastructure. Raising costs for these companies would force them to increase prices for consumers, potentially driving them to switch to alternatives such as the merged entity. However, the CMA concluded that the firm will need to keep its wholesale service competitive with its rivals to maintain business, thus, this is not a risk.
Another concern was the input foreclose in the supply of wholesale leased lines to MNOs, in particular passive fibre leased lines.
The costs of leased lines are a proportionately small component of rival companies’ overall costs, thus, it is unlikely that Virgin – who provides wholesale services to several mobile operators – would be able to raise the price of their wholesale services enough to impact consumer prices. Furthermore, there are other firms in the market such as BT Openreach, who provide these facilities. Therefore, the new entity would need to maintain its competitiveness to avoid losing wholesale custom.
A Rival
Most significantly, the horizontal integration will provide a more competitive bundle offering, promoting competition with BT, currently the top player in the market. Competition between these two firms will rattle the market and is likely to benefit consumers.
The transaction is expected to formally close on June 1.
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