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IDC Comment: BT/EE - it’s over to the regulators. But which regulators?

February 2015 by IDC

This morning it was announced that BT has agreed terms with Deutsche Telekom and Orange, to acquire their jointly owned UK mobile operator EE. The purchase price is £12.5 billion. Deutsche Telekom will hold 12% of the combined operator and will have a seat on the board. Orange will hold 4%, and will receive around £3.4 billion in cash.

So just under seven weeks after BT announced its intention to bid for EE, the buyer and the seller have agreed terms for the deal. That’s pretty quick work. But the next stage in the process is regulatory approval for the deal, and that is likely to take a good deal longer.

Which regulators will be scrutinising the BT/EE deal? As this is a merger between a UK ISP and a UK mobile operator, Ofcom and the UK Competition & Markets Authority are the obvious candidates. However, for the German merger between Telefonica’s O2 and KPN’s E-Plus, as well as other recent mergers in Austria and Ireland, it was the European Commission that scrutinised the deals and eventually approved them, subject to conditions that were designed to protect the strength of competition in those markets following a reduction in the number of mobile operators from four to three. The German regulator made a bid to take control of the approval process, but its petition was rejected by the Commission. Because of its size and its wider implications, The European Commission may want to scrutinise the BT/EE deal as well, and in some senses that might suit the two companies: recent statements by the new Digital Commissioner, Günther Oettinger, have clearly signalled a friendlier attitude to the interests of telcos than his predecessors showed.

Although the BT/EE deal is big enough, it’s already clear that it’s just one component of changes that are bigger still, in store for the UK telecoms market. Hutchison, the owner of mobile operator 3, has already announced its intention to bid to acquire Telefonica’s mobile operator O2. Sky has announced its attention to start offering mobile services as an MVNO. Vodafone has announced its intention to make a major entry into the market for home broadband, and it may be considering acquisition of one of the UK’s ISPs. (Vodafone has already done that in other European markets, including Germany and Spain.) Clearly, then, the BT/EE deal is the harbinger of a wider and more far-reaching shake-up of the UK markets for broadband, mobile and pay TV. On that basis, the UK can make a strong case that its regulators, and not the European Commission, should drive scrutiny of the proposed deals, so that their combined impact on the UK market as a whole can be assessed coherently.

Specifically considering the BT/EE deal: in one sense, it is less contentious from the competitive standpoint than the mergers that were approved in Germany, Ireland and Austria. BT does not currently own a mobile operator, and therefore the deal will not (by itself) result in fewer mobile operators competing in the UK. Indeed, it could be plausibly argued that for business customers, a BT/EE merger would make the UK mobile market more competitive. EE has already been making some headway in gaining market share among businesses, by virtue of its lead in the rollout and uptake of 4G services. The combination of EE’s 4G lead with BT’s brand strength and existing relationships with business customers could produce a much stronger competitor for Vodafone, the current leader in the UK business market for mobile. For consumers the merger could also bring benefits, in the form of a more vigorous market for mobile TV services and for quad play, the combination of home phone, home broadband, TV and mobile that has already proved highly popular in some other European markets such as France and Spain.

On the other hand, the competitive effect of a merged BT/EE on the market structure as a whole would need to be considered carefully. It would combine the UK’s biggest mobile operator (and the 4G market leader by a considerable margin) with the UK’s biggest home broadband service provider, and an increasingly significant challenger to Sky’s dominance in the pay TV market. Regulators will need to consider carefully how to counter-balance the increased market power of a combined BT/EE. As well as measures such as requiring spectrum divestment and stronger facilitation of MVNOs, another possible remedy might a requirement for BT to spin off Openreach as a separate company. In that event, we would see yet another corporate transaction being precipitated by the BT/EE deal.

In the UK communications market, the pieces of the puzzle are being thrown up into the air, and it’s not yet clear where they will all be when they are put back together. Two things are clear, though. Firstly, the picture will look very different then, from the one that we see today. And secondly, some lawyers and bankers are going to do very well indeed out of the UK market over the next year or so.

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