Italian MNO merger may be approved this week, ushering Iliad in
The European Commission could approve a €21.8bn merger between two Italian mobile operators as early as this week, even though it would reduce the number of MNOs in the country from four to three – recently a fatal sticking point for a similar proposal in the UK, where CK Hutchison failed in its bid to acquire Telefonica O2 and merge O2 with its Three UK operation.
CK Hutchison is also one of the players in the proposed Italian merger, with Vimpelcom’s Wind subsidiary. Competition commissioner Margrethe Vestager is said to be set to announce a green light for the deal ahead of the deadline of September 8.
According to regulator Agcom, a merged 3 Italia/Wind would serve 33.7% of the country’s mobile customers, putting it ahead of Telecom Italia’s TIM with 32.4% and Vodafone at 26.4%.
The EC’s instinctive hostility to reducing the number of MNOs – even in countries like the UK where the real competition now focuses on quad play services – has apparently been neutralized by concessions, which would involve creating a new MNO.
The two operators said a year ago that they wanted to merge 3 Italia and Wind Italia, to create a fixed/mobile player in a better positon to compete with Telecom Italia and Vodafone Italia. They then offered concessions to ease the path to approval, with the central offer being an agreement to divest infrastructure assets and spectrum to French quad play operator Iliad, to enable it to set up a fourth MNO.
This will be a disturbing prospect for Italian operators, given the disruptive effect which Iliad’s Free Mobile launch had in France, sparking a vicious price war and major job reductions at the older three MNOs. Iliad was also interested in a similar deal in the UK, but though Hutchison and Telefonica proposed similar concessions there – with other companies like BskyB, as well as Iliad, interested in the chance to enter the market – these were not enough.
In Italy last month, when Iliad announced its bid to acquire Wind assets, should the Hutchison merger proceed, shares in incumbent Telecom Italia spiralling downwards by almost 10% as shareholders braced themselves for market disruption similar to that inflicted on France.
However, the Italian market is very different to the French one which Free entered in 2012, and the company will have challenges in replicating its French success.
Iliad will pay €450m between 2017 and 2019 for 35 MHz of paired spectrum – 5 MHz in the 900 MHz band, and 10 MHz each in 1.8 GHz, 2.1 GHz and 2.6 GHz. It will also buy “several thousands of macro sites” in densely populated areas, as well as several thousand more in rural areas (though there is also an option to replace the latter with a RAN sharing agreement with the 3/Wind operator). Iliad has also negotiated a five-year roaming agreement, renewable for another five years, for the merged entity’s 2G, 3G and 4G networks.
Its entry could concern the leading mobile operators more than the creation of a stronger third player in the shape of 3/Wind. That merger is a defensive move, part of a wave of consolidation which is necessary if established European players are to have the scale to survive with their traditional model. The disruption, however, sets in when new entrants attack those business models and make them even less tenable.
In France, Iliad/Free used its cable and WiFi connections to support low cost WiFi-first mobile services and multiplays, undercutting established players dramatically and sparking a wave of consolidation and cost-cutting programs. The same could happen in Italy if Iliad succeeds in acquiring Wind.
However, in France, Iliad entered a mobile market which was ripe for disruption, with only three MNOs, which had sunk into a cosy situation in which there was limited growth, and limited effort to gain market share. Prices were inflated compared to more aggressively competitive markets like the UK. In Italy, Iliad could spark a new round of price spirals, but that would confine it largely to the low end of the market since, for the user base as a whole, fees already found their acceptable level during the cuts of the past few years. Telecom Italia Mobile has a lot of restructuring still to do, but is not the fat, easy target it would have been for Iliad in previous years. And Iliad does not have the fixed-line and WiFi assets in Italy which was the engine of its strategy in France.
Rating firm Fitch, while expressing caution over Telecom Italia should a new company enter the market (in addition to a strengthened 3 Italia), does not think the competitive landscape will be redrawn as it was in France. “Market leaders Telecom Italia and Vodafone are offering competitive tariffs in a lower price range, which reduces discounters’ propensity to use price-disruptive tactics,” the firm wrote in a research note last month. “With the growing importance of mobile data, network quality is becoming an important differentiating factor for consumers. Iliad may need time to establish brand recognition and a network of appropriate quality, which may defer the negative impact on competitive intensity.