* Deals come amid debate over health of EU telco sector
* Competition regulators view mergers on national level
* Germany, Ireland deals likely to be approved-lawyers
By Leila Abboud and Foo Yun Chee
PARIS/BRUSSELS, June 26 European regulators will
soon weigh in on two telecom acquisitions worth about 11.5
billion euros, in key test cases for a sector that executives
believe needs consolidation to counter falling sales and boost
Hutchison Whampoa agreed on Monday to buy
Telefonica's 02 Ireland unit for 850 million euros,
which would reduce the number of operators from four to three, a
threshold long seen as controversial for competition regulators
concerned about price rises.
Separately, Vodafone agreed to buy Germany's biggest
TV provider Kabel Deutschland for 7.7 billion euros.
The tie-up would create a strong integrated competitor to
former-monopoly Deutsche Telekom which is likely to
be seen as positive for competition.
But it could also set the country down a road to a risky
duopoly, with Vodafone and Deutsche Telekom each retaining
control of slightly more than a third of German mobile revenue
and Vodafone gaining power in fixed-line communications.
Both deals are likely to be reviewed by the European
Commission instead of the local authorities because they are
over a certain size or have major cross-border implications.
And both reviews will provide lessons for future deals of
these types. Italy, Germany, and Spain are four-player mobile
markets expected to consolidate in the coming years, while
mobile giant Vodafone is weighing more fixed-line deals in Spain
Competition lawyers and bankers interviewed by Reuters said
they believed antitrust regulators would ultimately approve the
two deals, perhaps with conditions imposed to protect
competition, such as spectrum divestments or wholesale access to
mobile and fixed competitors on fair terms.
Nevertheless, the reviews will be a reckoning for the
industry because they come during a broader fight between
telecom operators and European leaders over whether the region's
regulations have sapped the companies' ability to invest in new
faster networks and compete globally.
"Given the background music of the debate over whether
European telecom groups need greater scale, we have a unique
opportunity with these parallel deals to test the receptiveness
of antitrust regulators to this tune," said Peter Alexiadis, a
Brussels-based lawyer with Gibson, Dunn & Crutcher LLP.
"Both decisions will be keenly looked at by telecoms
companies to see if regulators are already willing to take into
consideration overall long-term industry dynamics and health
instead of the traditional focus on the short-term impact on
Before the recent deals, big telcos had lobbied hard for the
European Commission to take a softer line on mergers, especially
within countries, to reduce the number of operators and reverse
several years of declining sales.
Their hopes were raised in February when Neelie Kroes, EU
commissioner for the digital agenda, backed the idea as part of
her effort to pass reforms this year to foster a "single market"
for telecom services in the region.
Yet top competition regulator Joaquin Almunia remained
sceptical, arguing in a February speech that there was no
evidence that operators would invest more in networks or offer
better services to consumers if they scaled up.
According to antitrust law, his office must evaluate merger
impact on a national basis, not based on broader industry
"Until such a single telecoms market comes into life, the
commission will continue to assess competition cases, including
mergers, in the framework of national markets," said Cecilio
Madero, a senior antitrust official at the European Commission,
at a conference Tuesday.
On that basis, Hutchison's proposed purchase of Telefonica's
02 business in Ireland is likely to pose bigger antitrust issues
than Vodafone's mega-deal in Germany, competition lawyers said.
Hutchison's 3 brand would vault from fourth to second place
with a market share of 37.5 percent, just behind Vodafone's 39.4
percent and ahead of Meteor's 19.7 percent, according to data
from the Irish regulator.
Hutchison is prepared for the fight because it went through
a similar review in Austria last year when it bought larger
rival Orange to take a very competitive market of roughly 8.4
million people to three players.
Approval was secured after a long review but regulators
exacted a heavy toll, including reserving spectrum in a mobile
auction due this autumn for a new competitor. Hutchison had to
give local cable operator Liberty Global favourable wholesale
terms to start a mobile service, and divest assets and spectrum.
In Ireland, lawyers say Hutchison will seek to avoid such
harsh remedies by arguing that the market will remain
competitive with three players. Since fourth generation mobile
spectrum was sold in Ireland last December, regulators won't be
able to bring back a fourth player if consolidation is approved.
Key to the regulatory review will be mobile pricing.
According to an analysis of mobile pricing in 27 European
countries by consultancy Rewheel, Ireland is a "progressive"
mobile market because operators Meteor and 3 have lowered
smartphone plan prices and give large mobile data allotments.
But Ireland mobile prices remain quite high compared to
other competitive countries like Britain, Sweden or Austria,
said Rewheel's Antonios Drossos. "The worry is that after the
merger, prices would stay high or go higher," he added.
Hutchison did not immediately reply to messages left seeking
comment on what remedies if any it would offer in Ireland. The
company said on Monday it was confident the deal could be
completed in six to nine months.
Meanwhile, Vodafone's proposed buy of Kabel Deutschland in
Germany poses a new and different set of issues to regulators
because it marries two mainly complementary businesses and
networks - one in mobile and the other in fixed.
The deal would not affect mobile market share, with Deutsche
Telekom and Vodafone each retaining 34 percent of mobile revenue
at the end of 2012, followed by KPN and Telefonica with
16 percent each. In fixed telephony and broadband, Vodafone
would jump from 10.2 percent share to 18.9 percent after the
deal, according to Exane BNP Paribas.
Such market share figures are not likely to spook antitrust
regulators, so they will focus on the question of the new
company's relationship with Deutsche Telekom, said Frederik
Wiemer of law firm Heuking Kühn Lüer Wojtek.
The new company would be more independent of Deutsche Telekom
because it will no longer have to rent fixed broadband lines
into homes. Vodafone today owns some of its own broadband lines,
but very few.
"Germany would have two big companies able to offer
all-included bundled packages to consumers, which is
pro-competitive long-term," said Wiemer. "So in the end the
positive effects could outweigh the negative impact from
concentration in the broadband market."