EU Telecoms to Brussels: Show Us Some Love

NEW YORK (The Deal) -- European telecoms on Friday issued a plea to Brussels regulators to cut them some slack, just as Spain's Telefonica struggles to compile the right remedies package to win EU approval for its 8.55 billion ($11.8 billion) takeover of Royal KPN's German E-Plus unit.

Frustrated with the European Commission's consistently tough line on telecoms M&A, Telefonica CEO Cesar Alierta and peers from other top European phone companies sent an open letter to Digital Agenda Commissioner Neelie Kroes urging the EC to begin viewing Europe as a single market rather than as a collection of markets.

"This is impairing our ability to invest in the communications infrastructure needed to put Europe back on the path to growth and jobs, and to restore its global competitiveness," the executives wrote in the letter, spearheaded by the GSMA industry association.

The letter included most of the companies involved in the consolidation, although KPN was noticeably absent. Christian Salbaing, deputy chairman of the European unit of Hong Kong's Hutchison Whampoa, also added his signature to the letter: his company is at odds with Brussels over plans to buy the Irish unit of Telefonica.

The E-Plus takeover is one of a handful of deals to have faced EC scrutiny in recent years because of the effect they would have on national competition. In common with those other deals, the acquisition by Telefonica would cut the number of mobile networks in a national market - in this case Germany - from four to three, a development that regulators around the world bridle at because of its stifling effect on competition. But the telecoms argue that the consolidation is necessary because sales are falling in Europe, even though the region has one of the world's highest penetration rates in the world. This is jeopardizing the investment in infrastructure upgrades that the region needs, they claim.


Experts don't see the letter accomplishing much in the short term to stem the tough antitrust scrutiny in Brussels. "Any four-to-three mobile telecom deal anywhere in Europe will invariably go to Phase 2," said Rahul Saha, a London-based attorney with King & Wood Mallesons SJ Berwin.

Telefonica's acquisition of E-Plus would create a company of similar size to the current biggest players, Deutsche Telekom and Vodafone Group (VOD).

The Commission rejected a request from German competition authorities to review the case and recently laid out their concerns in a statement of objections, setting the stage for a tough tug-of-war on possible concessions. The procedure requires merging companies to come forward with suggestions, which can then be rejected or accepted by case handlers.

"Our view has been from the start that the deal is doable, but it depends on coming up with the right remedies," said Saha. To appease regulators, he predicts the buyer will have to offer "at least" two out of three possible solutions involving network access, redistribution or an outright divestment.

With the E-Plus takeover, as with other telecoms deals, analysts have said such concessions may appease regulators without a change in tack by the EC. However, since the field of operators is limited, the obvious remedy of spectrum sales may be difficult.


Many see a sale of spectrum as the biggest potential challenge, especially given Hutchison Whampoa's failure last year to find buyers for radio spectrum in Austria. The spectrum offer was one of the conditions for winning EC approval in December 2012 for Hutchison Whampoa's purchase of Orange Telekommunication GmbH from Mid Europa Partners--another deal which cut the number of operators to three from four.

To avoid another failed auction this time around, EC competition watchdogs could insist that Telefonica find an up-front buyer if it proposes selling spectrum, before the E-Plus takeover can close.

"The Commission may ask for an up-front buyer, but it may be difficult to find an up-front buyer and on a relatively tight deadline," said Saha. "This [is] where we see the significant risk in the deal."

Hosuk Lee-Mayikama, of Brussels-based think tank Ecipe, also has doubts that a spectrum offer is going to "cut it" with regulators in the case. "I don't necessarily see the landing zone for a possible agreement between Telefonica and the Commission," he said. On the other hand, "one thing that speaks in favor of this merger is that the Commission obviously wants to see more cross-border transactions."

The EC's in-depth review of the E-Plus deal, due to be wrapped up in mid-May, comes as Telefonica continues its buying spree elsewhere. It's reportedly in talks to combine its Mexican operations with Grupo Iusacell SA to challenge Carlos Slim's America Movil SAB and is nearing an agreement to buy a controlling stake in Spanish pay-TV company DTS Distribuidora de Television Digital SA.

For the next regulatory battle in European telecoms M&A, all eyes are on Paris-based Bouygues, which is competing to buy the Societe Francaise de Radiotelephone, or SFR, cellular unit of Vivendi in yet another national acquisition that would eliminate one of four providers. However, it's competing with cable company Numericable Group, which could potentially win the auction because of the lack of regulatory concerns.

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