The European Commission has blocked Three UK owner Hutchison Whampoa's £10.25bn deal to acquire rival O2 from Spanish national telecoms operator Telefonica.
Hutchison agreed a deal to buy O2 in January 2015. The deal, which would have made Three the biggest mobile operator in the UK, had to overcome scrutiny by the European Union's competition authorities. Until recently, the EU had approved of such deals, reasoning that the resulting higher prices would mean more investment in high-speed mobile networks. However, attitudes in Brussels have changed.
In response, Hutchison indicated that it was prepared to sell off network capacity and frequencies in a bid to mollify the Commmission's competition concerns. But in Brussels today, the Commission said that it had blocked the acquisition over strong concerns that UK mobile customers would have less choice and pay higher prices as a result of the takeover. The deal, moreover, would have harmed innovation in the mobile sector, it added.
The merger would have left the UK with only three mobile operators: Three UK, Vodafone and BT-owned EE.
In its investigation, the Commission found that the takeover would also likely have had a negative impact on quality of service for UK consumers by hampering the development of mobile network infrastructure in the UK. It said that the takeover would have also reduced the number of mobile network operators willing to host other mobile operators on their networks.
It said that the remedies proposed by Hutchison "failed to adequately address the serious concerns raised by the takeover".
Hutchison had proposed to give access to a share of the merged entity's network capacity to one or two mobile virtual operators, and divest O2's take in the Tesco Mobile joint venture while also offering a wholesale agreement for a share of its network capacity to Tesco Mobile. The company also proposed to offer a wholesale agreement for a share of its network capacity to Virgin Media.
The Commission suggested that even if those offers were taken up, the mobile virtual network operators would have been commercially and technically dependent on the merged entity, with limited ability or incentive to differentiate their offerings, including in terms of network quality.
It said that other suggested remedies were "commercially unattractive" or "difficult to implement".
Competition Commissioner Margrethe Vestager said: "Allowing Hutchison to takeover O2 at the terms they proposed would have been bad for UK consumers and bad for the UK mobile sector.
"We had strong concerns that consumers would have had less choice finding a mobile package that suits their needs and [would have] paid more than without the deal.
"It would also have hampered innovation and the development of network infrastructure in the UK, which is a serious concern especially for fast moving markets. The remedies offered by Hutchison were not sufficient to prevent this."
Three UK said it was "deeply disappointed" by the Commission's decision to prohibit the merger. It said it would consider its options, including the possibility of a legal challenge.
O2 had no specific comment to make in regards to the deal but said that its business "had continued to perform well in the market whilst the Commission process has taken place".
Kester Mann, principal analyst at CCS Insight suggested that the most likely eventual outcome for O2 is selling up to private equity.
He claimed that Liberty Global, which owns Virgin Media, could also consider a bid and that a sale or partial-sale to a deep-pocketed operator from outside the UK such as Softbank or America Movil could also be plausible.
"For the time being however, O2's parent Telefonica may elect to hold on to an asset that in recent years has impressively out-performed rivals despite its uncertain future," he said.
Mann said that Three's future looked "vulnerable" in a market rapidly transitioning to multi-play. A possible option, he said, could be to acquire TalkTalk.
"Such a deal would not attract major competition concerns and would offer greater scale as well as a position in the rapidly-growing UK multiplay market," he said.
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