LONDON Vodafone (VOD.L) has abandoned plans to merge its operations in Greece with Wind Hellas WINVTH.UL, in a major blow to the debt-laden smallest operator and throwing into doubt consolidation elsewhere in Europe.
Vodafone Chief Executive Vittorio Colao had warned that the world's largest operator by revenue needed to change the dynamic in Greece if it were to continue to invest in the country, but Monday's announcement will prove more serious for Wind in the short term.
The third-biggest Greek telecoms operator is owned by its bondholders and needed a deal to better compete in the market that has been hit by extreme pressures on consumer spending. It could still reach a network sharing deal with Vodafone.
"Vodafone Group and Largo Limited, the sole shareholder of Wind Hellas, confirm that they have agreed to terminate discussions relating to a potential business combination between Vodafone Greece and Wind Hellas," the group said in a brief statement.
Vodafone, which will give a trading update on Thursday, said in August that it was exploring a potential cooperation with Wind in a move that would have reduced the overall market from three players to two.
Both businesses were struggling against cell phone market leader Cosmote, a unit of former state monopoly OTE (OTEr.AT), and analysts and investors had watched the situation closely to gauge the mood of regulators in the face of such tough trading.
OTE is controlled by Deutsche Telekom (DTEGn.DE).
Vodafone announced a writedown on the business in November for 450 million pounds ($711 million), following an earlier writedown of 800 million pounds. Market leader OTE said in November that it would support the planned merger, and that it expected the regulator to agree.
Vodafone made the short announcement on Monday without giving a reason for the decision, although the two groups had decided that they would struggle to get the deal past European regulators, a source familiar with the situation said.
Mobile operators have struggled in recent years in mature European markets, where increasing competition and pressures on consumer spending have pushed down on tariffs at a time when investment is needed in networks to support data-hungry devices, such as smartphones.
In Britain, Deutsche Telekom (DTEGn.DE) and France Telecom FTE.PA merged their operations to form the joint venture Everything Everywhere, taking the market from five to four operators, and further consolidation was announced in Austria last week.
Analysts have also speculated that Telefonica's (TEF.MC) O2 would merge its German operations with KPN's (KPN.AS) E-Plus, while Spain also appears ripe for a deal.
Analysts said a Vodafone deal with Wind was always a long shot and that the decision to walk away indicated that regulators simply would not accept a market with only two players, however tough the conditions.
Will Draper of Espirito Santo said that did not mean that consolidation could not take place in markets such as Germany and Spain however, as long as three operators remained.
"To go to two players each with 50 percent market share just breaks all the rules," he said. "I think it was very speculative, given the trauma that the Greek market and Wind in particular were going through."
An attempt in 2010 to take the Swiss market to two players from three also failed when competition regulators ruled that that would be bad for consumers.
The announcement however is still likely to come as a surprise to investors and analysts as Vodafone had looked close to announcing some kind of a deal as recently as last week.
Shares in the group were up 0.2 percent, compared to a FTSE 100 trading slightly lower.
($1 = 0.6329 British pounds)
(Reporting by Kate Holton; Editing by Louise Heavens)