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May 30 (Reuters) - (The following statement was released by the rating agency)
Regulatory approval by the EU Competition Commission of Hutchison Whampoa’s O2 Ireland acquisition boosts the chances of Telefonica getting a green light for its acquisition of E-Plus in Germany and could open the door for consolidation in Spain, Fitch Ratings says. A condition of the approval is that Hutchison must provide network capacity to two Irish mobile virtual network operators (MVNOs), but we do not expect this to have the same disruptive impact that MVNOs have had in some other European markets.
The Competition Commission’s approval follows a similar decision to allow Hutchison to buy Orange’s operations in Austria, and indicates a gradual softening of European opposition to telecom consolidation. This could allow Telefonica’s much larger proposed acquisition of KPN’s German E-Plus arm to proceed. But there are significant differences so that approval is not certain. In particular the German market is much bigger than Ireland’s or Austria‘s, which could lead the regulator to decide that the country can support four major operators.
If the German deal is approved it will be positive for the credit profile of both companies. Telefonica will benefit from a significantly stronger operating profile, while KPN will receive EUR5bn in cash and a stake in the enlarged German Telefonica business.
Approval could also open the door to consolidation in other markets such as Spain and Italy. TeliaSonera has previously considered selling its Spanish Yoigo mobile operations, but shelved these plans and concentrated on building its market share, helping to drive fierce price competition in the process. It is possible a successful German deal could make TeliaSonera look again at selling the business, which would be positive for all Spanish operators if it reduced damaging price competition.
The Hutchison/O2 Ireland deal should reduce competitive pressures by cutting the number of operators from four to three and transforming Hutchison’s Three arm from a disruptive challenger to a business with a leading position in a market where competition is more evenly balanced.
While Hutchison must provide 30% network capacity to two MVNOs, we do not believe a new MVNO entrant has the potential or motivation to disrupt the market as much as Hutchison’s Three did in the past. The most likely partner for this capacity is Liberty Global’s UPC arm, because it already has an established cable business in Ireland and piggy-backing on the Hutchison/O2 network as an MVNO would enable it to offer a combination of TV, fixed-line, broadband and mobile services.
While UPC’s mobile strategy is at an early stage, it has not so far taken an aggressive approach to launching similar “quad-play” services in other markets and has tended to avoid aggressive, price-based competition to build up its customer base.
Cable operators have so far tended to restrict their mobile services to existing customers, of which UPC has 530,000 in Ireland. The network based operators are chasing a market with a population of 4.6 million and SIM penetration of 5.6 million. Markets where cable MVNOs have grown strongly are usually those where quad-play or convergent services are far more established, such as Spain, Belgium and to some extent, the UK.