What just happened?
The General Court (GC), Europe’s second-highest court, annulled a 2016 ruling made by the European Commission to block a proposed £10.25bn merger between O2 and Three on consumer interest grounds.[1] The court ruled that the Commission had made several ‘errors of law’ and could not prove that competition would be harmed in the crowded UK telecoms market. This landmark ruling strikes a blow for Margrethe Vestager, the EU’s tough-acting competition commissioner, and could pave the way for further consolidation between Europe’s mobile operators.
What does this mean?
To make full sense of this ruling, we have to move back to 2016 when the proposed merger of O2 and Three would have created the largest mobile network in the UK. As of May 2018, BT (including EE), owned 28% of the market share; Vodafone 21%. On these figures, an O2-Three tie-up would gobble up over one-third (38%) of the UK pie.[2]
For the European Commission, this consolidation sailed too close to the wind on three counts.[3] First, it would likely occasion higher prices and reduce consumer choice. Second, it would hinder the development and rollout of new infrastructures, such as 5G, within UK borders. Third, it might adversely affect the UK’s virtual network operators, such as Tesco Mobile and TalkTalk, who piggyback on the larger networks.
Crucially, however, the GC reached the conclusion that none of these objections could be proved and so overturned the Commission’s primary verdict. Specifically, the court argued that the Commission had failed to show that Three was a competitive force in the UK and that Three and O2 could reasonably be regarded as close competitors.[4]
It looks to be one of those rulings whose repercussions ring out well beyond the confines of the individual case. Indeed, the merger will still have to face a stern test in the form of Ofcom and receive the green light from the UK Competition and Markets Authority.[5]
What matters is that the GC has increased the Commission’s evidential burden for blocking telecoms mergers. Since 2004, as Allen & Overy point out, European merger law has revolved around assessing whether a proposed deal represents a ‘significant impediment to effective competition’, or SIEC.[6] Yet, until the O2-Three case, ‘more likely than not’ or ‘the balance of probabilities’ has sufficed as a legal marker against which mergers are judged. Now, the Commission must adhere to stricter standards of proof.
The ruling will be music to the ears of telecoms giants, who have long criticised what they perceive to be the Commission’s outmoded attitude towards competition. Their frustrations have concentrated on challenging the prevalent view that markets require at least four competing networks. Indeed, four-to-three consolidation has become something of a cause célèbre since 2014 when Margrethe Vestager took over the reins and subsequently hardened enforcement policy, beginning with a successful campaign to block a Danish mobile joint venture.
What does it mean for the legal sector?
Though European mobile network operators will be watching this space with eager eyes, it is unlikely that this court ruling will lead to a flurry of new business activity in the short term. For a start, the Commission has more than two months to appeal the verdict to the European Court of Justice, the highest court in the continent. Given the profound implications of the ruling for future mergers and acquisitions, this seems a highly probable scenario.
Furthermore, legal ambiguities remain about the level of proof required by the Commission to veto mergers. One of the ECJ’s most complex tasks, if called upon, will be to clarify a satisfactory position between ‘more likely than not’ and ‘beyond all reasonable doubt’.[7]
Law firms will undoubtedly see an increase in M&A interest following this ruling, particularly in an advisory capacity, and not just in the telecoms sector.
Nevertheless, it would be surprising if the issue were to go away since the court’s ruling pertained to the level of proof rather than the validity of the judgment. In other words, it very much remains to be seen whether or not four-to-three consolidation increases prices or delays the development of mobile network infrastructure. If a wider body of evidence points towards the conclusion that three is not enough, then more litigation might be required. If the Commission faces an uphill battle, the war has not yet been lost.
Written by Tom Higgins Toon
Assessing Firms:
All European corporate law firms, particularly those focused on M&A.
References:
[1] Nic Fildes and Javier Espinoza, ‘European Commission’s decision to block Three-O2 deal annulled’, Financial Times (28 May 2020).
[2] ‘Market share held by mobile operators in the United Kingdom (UK) 2018, by subscriber’, Statistica (May 2018).
[3] Angelique Bret, ‘Telecoms merger cases will be shaped by new EU ruling’, Out-Law (29 May 2020).
[4] Wave of Consolidation in the UK telecoms market’, The Economist (17 July 2020).
[5] Steve McCaskill, ‘O2-Three merger could be back on’, Tech Radar (May 28 2020).
[6] Allen & Overy, ‘The General Court annuls the European Commission’s prohibition of the Three/O2 merger - a reset for EU merger control?’ (2 June 2020).
[7] Ibid
Disclaimer: This article (and any information accessed through links in this article) is provided for information purposes only and does not constitute legal advice.