August 13, 2012 / 10:02 AM / 7 years ago

Analysis - Austrian deal to test EU's stand on telecoms M&A

PARIS (Reuters) - It’s a small acquisition in a small country with big implications for the future of Europe’s telecom sector.

Hong Kong’s Hutchison Whampoa 0013.HK, which owns Austria’s third-largest mobile operator, wants to take over fourth-placed Orange Austria as it tries to expand market share and improve profitability in one of Europe’s most competitive telecom markets.

Standing in its way are European Union antitrust regulators, who are investigating the proposed 1.3 billion-euro merger to ensure that consumers would not be hurt if the number of operators in Austria falls from four to three.

The decision, expected by November 27, directly affects a country of only 8.2 million people.

However, telecoms executives and investors hoping for similar consolidation in much bigger markets will scrutinise the ruling for how it might apply to countries such as Spain, Italy and Germany - which also have four mobile operators but populations up to 10 times greater than Austria’s.

With mobile prices falling in many markets because of competition and regulatory changes, mergers are increasingly seen as crucial to restoring the competitiveness of Europe’s telecom groups.

Unlike U.S. peers such as AT&T and Verizon, the region’s operators have not managed to translate consumers’ growing appetite for smartphones and tablet computers into profit, and the need to invest heavily in faster broadband and mobile networks is also pressing.

“Everyone in the sector agrees on the need for consolidation, but executives have been terrified that competition authorities won’t allow it,” said Michael Grenfell, a partner specialised in antitrust at law firm Norton Rose.

“The outcome in the Austria case will tell us if mergers to go from four to three players in a market can ever be allowed, and quite possibly when they can be allowed.”

Consolidation may be on the horizon in Spain where the smallest mobile operator Yoigo has been put on the block by owner Teliasonera TLSN.ST with larger rivals Vodafone (VOD.L) and France Telecom FTE.PA to consider bids. In Germany, Telefonica (TEF.MC) and KPN (KPN.AS)were in merger talks earlier this summer but failed to reach a deal, while in Italy combinations could make sense among Vodafone (VOD.L), Wind VIP.N and Hutchison.

WATCHDOGS

In Europe, mergers that have cross-border implications or are very large are reviewed by regulators in Brussels instead of the member states’ antitrust watchdogs. In a few cases, the EU has blocked deals outright, such as the merger of NYSE Euronext and Deutsche Boerse earlier this year, but usually wrings out concessions, including divestments, to protect competition.

Experts on EU law are reluctant to second guess the European Commission but think Hutchison will win approval, with strings attached. “I would be surprised if this deal gets blocked. It cannot be excluded but I think the parties will make a strong case,” said Francesco Liberatore, a lawyer at Jones Day.

Regulators reviewing telecom mergers typically look at the number of providers in each country, their market share and behaviour on pricing, and holdings of mobile frequencies. They also study consumers’ habits, such as how often they defect to a new provider and whether there are patterns to such switching, which would imply that two players are offering similar deals in terms of services and pricing.

Underpinning this is the “philosophic question” of how many mobile operators are needed to preserve competition in a market, said Liberatore.

EU regulators tend to be wary of going from four to three players for fear that an oligopoly can take root with no company seeing need to cut prices, lawyers said.

They waved through consolidation from five to four players in Britain in 2010, and from four to three in the Netherlands in 2007. But outside the EU, Swiss antitrust watchdogs blocked France Telecom’s proposed acquisition of Sunrise in 2010 because it would have created a duopoly.

When the United States blocked AT&T’s (T.N) $39 billion purchase of T-Mobile USA, barring the market from going down to three players, regulators were particularly concerned by the elimination of T-Mobile since it was seen as price-cutting, innovative player.

Hutchison tends to play a similar role of the low-cost “maverick” in the six European markets where its ‘3’ brand is present. It stuck with unlimited mobile data packages in Britain long after rivals ended them, and recently started giving away free broadband to boost smartphone adoption in Austria.

In Austria, Hutchison is arguing that merging the two smallest mobile operators will benefit consumers by giving the bigger company more scope to invest in services and a faster 4G mobile network.

Austria, where four operators compete in a relatively small market, already has lower prices than average in Europe, according to analysts.

The Hutchison-Orange combination would still be the smallest player in Austria, with service revenue market share of 25 percent, behind Telekom Austria (TELA.VI) and Deutsche Telekom.

Jones Day’s Liberatore said regulators would have to weigh the effect of two smaller players teaming up to compete more vigorously. “The Austria case is very different from the AT&T deal where the second-biggest player was seeking to buy T-Mobile, the maverick smallest player in the market,” he said.

To placate regulators, Hutchison has already signed a deal to allow another player to enter the Austrian market using its network if the Orange merger is approved.

Orange Austria is also selling its Austrian discount brand Yesss! to Telekom Austria as a condition of the merger. That part of the deal is now being reviewed by Austria’s competition authorities.

Gabriele Cipparrone, who specialises in telecom buyouts at Apax Partners private equity, said companies seeking to do deals must propose such remedies or risk being blocked.

“With any deal, you need to make sure that you have a dialogue with regulators and put the appropriate remedies on the table to maximise your chances to get approval,” he said.

PREDATOR OR PREY

The EU decision is important for Hutchison elsewhere in Europe because nearly a decade after its launch, the ‘3’ brand still holds less than 10 percent share in the six markets, including Britain, Italy and Sweden, where it is present. Hutchison has said it wants to stick with its European foray, and seek to expand its market share via acquisitions.

“Hutchison wants to be predator instead of prey, but if regulators tell them they can’t buy their way to bigger scale, then they might have to reconsider,” said Thomas Wehmeier, analyst at Informa Telecoms & Media.

Fabrizio Cerina, an investment banker at Credit des Alpes, said regulators had to take a more flexible view on mergers if they wanted European telecoms groups to invest in networks and continue to provide jobs.

“In the U.S., there are four mobile operators and consumers are well served and well protected. In Europe there are 140, and that just seems out of whack,” said Cerina. “Consolidation in Europe must happen at a faster pace than it has until now.”

Additional reporting by Paul Sandle; Editing by David Stamp

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