European Commission takes serious hit in court’s overruling of decision to prohibit Hutchison/O2 merger

August 2020  |  SPECIAL REPORT: COMPETITION & ANTITRUST

Financier Worldwide Magazine

August 2020 Issue

On 28 May, the EU’s General Court (GC) delivered one of the most significant knockbacks to the European Commission in respect of a merger decision for many years: its judgment in CK Telecoms UK Investment v Commission annulled the decision by the Commission in 2016 to prohibit the merger between two of four UK mobile network operators (MNOs) – CK Hutchison’s Three and Telefonica’s O2 UK. The GC’s judgment effectively dismantles many parts of the Commission’s reasoning in its original prohibition decision, leading to potentially significant implications, not only for MNOs and other players in the telecoms sector, but for any companies currently engaged in or contemplating mergers in oligopolistic markets.

The Commission’s Hutchison/O2 merger decision

The Commission blocked Hutchison’s proposed merger of its Three network with O2 on the grounds of alleged “non-coordinated” effects – also known as unilateral effects, where the merged entity is able to unilaterally exercise market power – on the UK’s retail and wholesale telecoms markets. On the retail market, the Commission had found that the merged company’s projected 40 percent share would enable it to unilaterally exercise market power to raise prices or reduce the quality of telecoms services.

On the wholesale market – with MNOs such as Hutchison’s Three hosting services for mobile virtual network operators (MVNOs) – the Commission found that Three was an important competitive force, the loss of which would lead to anticompetitive, non-coordinated effects in a highly-concentrated market. The Commission also concluded that the transaction would harm competition by jeopardising future investment in UK telecoms infrastructure, such investments being managed via complex network infrastructure-sharing agreements.

Rejection of Commission’s substantive assessment

Compared with the majority of other judgments from the GC and Court of Justice concerning successful challenges to Commission merger decisions, the GC judgment in this case is notable in itself for the multiple holes picked by the GC in the Commission’s decision. The GC concluded that the Commission had committed several errors in its reasoning when assessing the impact of the proposed transaction on competition. These faults extended to each of the main aspects of the substance of the case, including the UK mobile services retail market, the wholesale market and network-sharing arrangements between the major MNOs in the UK.

As regards the retail market, the GC found that the Commission had not established that Three was an important competitive force in the market or a close competitor of O2 and that the Commission’s supporting econometric analysis “lacks probative value”.

In the wholesale market, the GC was unconvinced by the assessment carried out by the Commission. It found that while Three was a credible competitor in supplying MVNOs and other providers in the wholesale market, influencing competition even when it did not win bids, this was not sufficient to classify Three as an “important competitive force”. Moreover, Three and O2 did not exert upon each other important competitive constraints that would be eliminated post-merger.

As regards network-sharing arrangements, the Commission had expressed serious concerns that the presence of the merged entity in the two main network sharing agreements in place in the UK – one such agreement was between EE and Three, while the other was between Vodafone and O2 – would result inevitably in a reduction in incentives for the other parties to those agreements to invest in future network roll-outs. The GC disagreed, finding that there was no solid basis for the Commission’s claim that a disruption to operators’ alignment of interests in the network-sharing agreements could harm competition.

Scrutiny of Commission’s non-coordinated effects doctrine

In reaching all of these findings, the GC has set its sights in particular on the Commission’s interpretation of the non-coordinated effects theory of harm. That theory of harm really took flight off the back of an amendment of the EU Merger Regulation in 2004, which had been focused previously on deals which created or strengthened a dominant position in the market.

A series of changes in 2004 effectively extended the merger regulation to deal with transactions which did not lead to any creation or strengthening of a dominant position, but which nonetheless could result in a substantial lessening of competition in an oligopolistic market. The test under EU law therefore became whether a merger would lead to a significant impediment to effective competition (SIEC), as opposed to a specific test wedded to the concept of building a dominant position.

Untested in the courts until now, the prohibition of the Hutchison/O2 merger – a Commission decision that relied heavily on a specific interpretation of the non-coordinated effects theory of harm – represents the moment that the GC has provided its judicial interpretation. In its original decision, the Commission had particularly focused on the loss of the competitive constraint posed by Three in the highly concentrated UK retail and wholesale mobile services markets.

In its judgment, the GC found that the Commission did not demonstrate with sufficiently credible evidence that the merger would result in the elimination of an important competitive constraint; instead finding that the Commission had confused the SIEC test, the concept of the elimination of an important competitive constraint and the elimination of an important competitive force. The GC noted that, were the Commission to continue to follow the approach it took in its assessment of the Hutchison/O2 merger, it could prohibit any horizontal merger in an oligopolistic market since the elimination of a competitive force would be treated automatically as the elimination of a competitive constraint, justifying a finding of an SIEC.

The GC’s judgment represents in many ways a recalibration of the Commission’s current approach to determining what constitutes an SIEC. The GC has clarified that there must be a “strong probability” of harm as a result of a transaction, and the Commission is not entitled to label automatically all operators in a concentrated market as “important”; rather, the player that is being removed from the market as a result of the merger must “stand out” as posing a significant competitive constraint (not just having been a competitive force) in the market. The standard of proof that the Commission must satisfy in order to demonstrate that a player is sufficiently important has been raised substantially.

Impact on future telecoms mergers

For MNOs and MVNOs specifically, this judgment is a significant one. In recent years the Commission has consistently opposed mobile services mergers which would result in consolidation of national markets from four MNOs to three. Hutchison itself was involved in one such decision when, in 2016, Hutchison and its proposed joint venture partner Wind Tre, made substantial divestments of spectrum and infrastructure assets in Italy, in order to address the Commission’s concerns that a fourth operator would disappear from the Italian market.

It can be expected that MNOs in Europe may feel emboldened to pursue further consolidation in national markets, particularly where there is strong evidence of the potential for increased investment in network infrastructure as a result of a proposed merger. The GC’s judgment comes at a time when further consolidation of the UK telecoms sector has been announced: Liberty Global and Telefonica, which plan to merge the former’s broadband, cable and MVNO in the UK (Virgin Media) with the latter’s O2 network, will be studying the GC’s judgment for any encouragement or reassurance in respect of the antitrust aspects of their transaction.

Good news for non-telecoms players too?

The judgment in all likelihood makes it more difficult for the Commission to prohibit mergers – or to extract significant remedies from merging parties – in oligopolistic markets, in the absence of clear evidence of harm to competition as a result of the transaction. The judgment effectively curtails the Commission’s discretion in these types of cases, as well as confirming the importance of a full and rigorous analysis of the effects on competition of a transaction, building on recent case law from the Court of Justice which has increasingly stressed the importance of comprehensive, robust effects analyses.

Commission case teams handling what are already complex merger investigations in oligopolistic markets face the challenge of meeting this new, higher threshold when trying to prove that a merger is likely to lead to the removal of an important competitive constraint in a market.

The Commission has stated that it is considering the implications of the GC’s judgment “urgently”. Given the significant impact that the judgment has on the Commission’s assessment of mergers in oligopolistic markets, it seems likely that the Commission will give serious thought to launching an appeal (it has up to two months from the date of the judgment to launch an appeal at the Court of Justice).

In the immediate future, parties that are engaged in appeals against other merger prohibition decisions may draw strength from this judgment: ThyssenKrupp, currently engaged in an appeal against the Commission’s prohibition of its proposed joint venture with Tata Steel last year, will be particularly interested in the impact of this judgment given that part of its appeal alleges a wrongful application of the SIEC test.

In a wider context, companies contemplating mergers in concentrated markets should evaluate the positive implications the judgment may have for what may otherwise have seemed a daunting regulatory landscape. The judgment in this case does not represent a panacea for all possible mergers in concentrated markets which would otherwise have faced real antitrust problems.

The judgment does, however, indicate that merging parties have real scope to advocate the approval of such mergers where there is no robust and unambiguous evidence that the transaction will result in the removal of an important competitive constraint.

Matthew Levitt is a partner and David Cardwell is counsel at Baker Botts LLP. Mr Levitt can be contacted on +32 (2) 891 7360 or by email: matthew.levitt@bakerbotts.com. Mr Cardwell can be contacted on +32 (2)891 7330 or by email: david.cardwell@bakerbotts.com.

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BY

Matthew Levitt and David Cardwell

Baker Botts LLP

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