Mergers & Acquisitions

Alternative operators up their game as BT/EE marriage draws near

From the end of this month, the UK will look more like other major European markets, with a former state monopoly holding a commanding position across fixed, mobile and, potentially, quad play services. Rather like the US before the reunification of AT&T, the UK has had a period when the fixed-line incumbent had no significant mobile business. But with approval from the UK Competition and Markets Authority (CMA), the final major barrier to BT completing its £12.5bn acquisition of mobile leader EE fell, and the deal should be finalized on January 29.

This creates a very different competitive landscape, though just how different will also depend on whether there are future changes imposed by regulator Ofcom about BT’s future structure – notably, whether there will be additional walls built between its wholesale and retail activities, or even a complete separation. For now, BT has escaped such measures, but its rivals will surely continue to lobby for greater separation as Ofcom conducts its Digital Communications Review, especially if they perceive any hint that the telco’s retail operations are gaining unfair competitive advantage from its ownership of broadband and backhaul infrastructure.

Even without that issue, BT now has leadership in both fixed and mobile services, together with significant businesses in pay-TV, enterprise services, global IP connectivity and so on.

Its ability to build a multiplay platform and compete across the whole gamut of services seems impossible to challenge, so competition will rely on strong players which can, at least, provide an alternative in specific areas, and perhaps partner with one another to support multiplay combinations for consumers or business.

Liberty Global’s Virgin Media is strong in broadband, TV and, increasingly, WiFi, and does have an MVNO – and of course, rumors that it might merge with Vodafone refuse to die. That combination would be a good counterweight to the enlarged BT, but would face high regulatory and integration barriers (especially if part of a broader international asset swap or merger).

Otherwise, BSkyB on the pay-TV front, the other three MNOs, and TalkTalk in broadband cannot field a full multiplay – nor do the various potential merger combinations look anything like as comprehensive as BT/EE.

The other major proposed UK merger, between Telefonica’s O2 UK and Hutchison’s 3UK, is likely to face a rougher ride than BT got, even though its impact on levels of competition and choice will be smaller. The enlarged MNO would be a more effective competitor to BT’s new mobile business, but would have limited ability to create multiplays – indeed, O2 has pulled away from the broadband sector in recent years.

The regulatory hostility is likely to be because there would be a reduced number of MNOs, not a factor with BT/EE. Although the European competition authorities were more willing to consider such mergers last year, approving them in Germany and Ireland, by the end of 2015 they were taking a harder line again, as seen in the failure of a plan to merge two MNOs in Denmark.

Ofcom chief Sharon White has expressed concern about the UK losing the innovative pricing approach of 3UK, which has always been in the role of challenger in the highly competitive market. And while it is likely that 3UK would have to divest spectrum and network capacity to rivals, European competition commissioner Margrethe Vestager could impose even tougher conditions. In Denmark, Telenor and Telia walked away from their proposed merger because of the penalties she wanted to impose.

TalkTalk’s official response to the CMA approval of the BT deal went to the heart of the issue of the increasingly outdated criteria for assessing market power and choice, which treat mobile and fixed sectors as far more separate than they really are.

“It is dangerous that the regulator has looked at this merger in isolation, given the unprecedented levels of consolidation taking place in the wider telecoms industry,” the broadband provider  said. However, it is also resisting the O2/3UK merger on the grounds that it would be likely to push up prices. “If the experience of other European markets such as Ireland and Austria is any guide, moving from four to three mobile providers will lead to price increases of 25% or more,” it said in its statement.

BT’s competitors still have the chance to influence Ofcom’s review of its structure and the role of its Openreach wholesale local access arm. Breaking this away from the retail arm would at least limit what Vodafone and others see as an unfair advantage for BT, in terms of access to broadband infrastructure and mobile backhaul lines. In a statement following the CMA decision, Vodafone said: “We believe it is imperative that the wider market concerns relating to BT Openreach, raised by a number of parties and recognised by the CMA, need to be thoroughly scrutinized by Ofcom in its Digital Communications Review.

TalkTalk concurred, saying: “Given BT Group’s increased size and scale, the need to ensure that the UK’s broadband infrastructure is not neglected is more important than ever.”

Some analysts also voiced concern. John Delaney of IDC told TelecomTV: “We are not very surprised that the CMA has decided against competitive remedies in the BT/EE retail business. We did, however, expect that there might have been some remedies in the ‘carrier’s carrier’ part of BT’s operations, since it is a dominant player in some important carrier markets. It will be important for the UK regulators to keep a close watch on BT’s carrier’s-carrier operations post-merger, to continue ensuring fair play in this area.”

There is competition to BT in fiber access and backhaul – from Virgin and from Vodafone’s new wireline activities, but also from smaller firms such as CityFibre, which recently boosted its network by acquiring Kcom for £90m. CityFibre has been gaining profile, and customers, as an alternative fiber operator, and recently secured £180m in new funding.

Its strategy is to build out wholesale networks on a city-by-city basis, with its initial assets in York and Hull. The first market where it will launch using Kcom’s fiber is Bristol. CEO Greg Mesch says his firm’s medium term objective is to create a dense network in 50 towns and cities with an addressable footprint of 35,000 public sector sites, 10,000 cell sites, 350,000 businesses and 5m homes.

He said in a statement, on the finalization of the KCom deal: “This is a momentous day for UK broadband infrastructure, which has seen no meaningful alternative investment for well over a decade. By combining the unique and highly attractive KCom network assets with our own, we are well-positioned to tap into future growth in the rapidly evolving UK fiber market. With a significant presence in 36 cities, 21 of which are completely new markets for us, we are now established as a credible alternative to BT Openreach.”

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