Telecoms regulators' approval of vertical consolidations might not be enough to spur foreign investment in EU market, says expert

Andrew McMillan of Pinsent Masons, the law firm behind Out-Law.com, said that the strict approach competition regulators within the EU are taking towards "in-sector or horizontal consolidation" in the telecoms market might discourage foreign investment in the EU market.

McMillan said that a lack of foreign investment might prevent EU telecoms companies from operating at sufficient scale and profitability to be able to invest appropriately in new digital infrastructure.

McMillan was commenting after the European Commission cleared Vodafone and Liberty Global to create a joint venture company in the Netherlands.

Mobile network operator Vodafone has agreed to sell its consumer fixed line business in the Netherlands as part of the deal to overcome competition concerns expressed by the Commission. Liberty Global trades as Ziggo in the Netherlands and offers both fixed line and mobile services to consumers.

"The Commission assessed the transaction against the backdrop of current access obligations in the Netherlands and had concerns that the merger, as initially notified, would have reduced competition in the markets for fixed multiple play services and for fixed-mobile multiple play services in the Netherlands. The merger would have removed Vodafone as a player with the potential to exercise a strong competitive constraint in these markets," the competition authority said. "This would likely have led to higher prices and reduced competition on the markets."

"The divestment entirely removes the overlap between the activities of Vodafone and Liberty Global in the markets for the provision of fixed and fixed-mobile multiple play bundles and so addresses the identified competition concerns. The Commission therefore concluded that the transaction, as modified by the commitments, would raise no competition concerns," it said.

Telecoms expert Reg Dhanjal of Pinsent Masons said that the tie-up of Vodafone and Liberty Global in the Netherlands "highlights the current focus of the telecoms and cable sectors on the provision of quad-play services – fixed telephony, broadband, mobile and TV".

Dhanjal and McMillan said the Commission's decision to approve the joint venture was not surprising. They reflected on the "tough stance" the EU's competition commissioner Margrethe Vestager has taken to telecoms mergers. They highlighted that the circumstances of the Vodafone/Liberty Global deal are similar to another major corporate transaction in the European telecoms market which won regulatory approval earlier this year, and different to another planned merger which failed to win clearance.

"The Commission blocked the planned Three/O2 merger, which would have involved consolidation of two major mobile operators in the UK that are in direct competition with one another," McMillan said. "That decision was backed by the UK's Competition and Markets Authority (CMA) and Ofcom. In contrast the CMA approved BT's acquisition of EE as it identified a relative lack of overlap between the businesses in telecoms markets, despite the sheer scale of the merged business drawing concern from the companies' rivals, including Vodafone."

"Like the BT/EE deal, the Vodafone/Liberty Global joint venture will involve a degree of vertical consolidation. Vodafone's pledged divestment will remove the only horizontal overlap, but there will still be synergies in the context of mobile backhaul, for instance. This decision, considered also in the context of the Three/O2 ruling, indicates that regulators are prepared to sanction a degree of vertical consolidation in the telecoms market but will adopt a tough stance in respect of in-sector or horizontal consolidation," he said.

"However, that approach is short-termist. It is too focussed on immediate pricing implications for consumers and fails to recognise the importance of scale to telecoms businesses. Those companies are being relied upon by to deliver next-generation digital infrastructure but are hitting constraints as they seek to grow their businesses. Consolidation is necessary to help those businesses achieve levels of profitability to support investment in new infrastructure," McMillan said.

"The approach may also dissuade prospective investors in the EU telecoms market from buying EU-based telecoms operators. Whilst there is scope for vertical consolidation the most likely buyer will be one who is already active in the relevant jurisdiction. The reluctance to allow in-sector or horizontal consolidation may result in reduced interest in mobile telecoms M&A deals in Europe. This lack of investment will have implications for the development and deployment of new broadband services," he said.