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European Commission snuffs the light out of O2 - Three deal

Commission says a big fat no to CK Hutchinson's proposed acquisition of Telefonica's O2. A Brexit is probably sounding pretty good to them right about now

The European Commission has smothered the life out of Telefonica's sale of O2 to CK Hutchison, the owner of Three, citing serious concerns over customer choice and prices.

The planned deal, worth £10.3bn, would have created the largest network operator in the UK, reducing the number of serious players from four to three.

Europe's competition commissioner, Margrethe Vestager, said that the merger was not in the interests of the mobile wielding and public.

"The goal of EU merger control is to ensure that tie-ups do not weaken competition at the expense of consumers and businesses," said Vestager. "We want the mobile telecoms sector to be competitive, so that consumers can enjoy innovative mobile services at fair prices and high network quality."

The EC said that concessions offered by Hutchison, which included a five year price freeze and investment in UK infrastructure, were ‘not sufficient’ enough to alleviate concerns.

O2 was surprisingly nonchalant about the ruling.

"We work in an industry of constant change and have learnt how to manage that change better than most," an O2 spokesperson told the BBC. "Regardless of what happens next, we will continue to deliver for our customers as we always have."

Hong Kong-based Hutchinson was – understandably – a bit more irate about the EC’s decision.

"We will study the Commission’s Decision in detail and will be considering our options, including the possibility of a legal challenge,” the telecom giant said in a statement.

“We strongly believe that the merger would have brought major benefits to the UK, not only by unlocking £10bn of private sector investment in the UK’s digital infrastructure but also by addressing the country’s coverage issues, enhancing network capacity, speeds and price competition for consumers and businesses across the country and dealing with the competition issues arising from the current significant imbalance in spectrum ownership between the UK’s MNOs.”

The collapse of the deal leaves both Three and O2 in a perilous position.

Commenting on the scuppered deal, Kester Mann, principal analyst at CCS Insight, said: “The most likely eventual outcome for O2 is sale to private equity, however Liberty Global, which owns Virgin Media, could consider a bid. Sale or partial-sale to a deep-pocketed operator from outside the UK such as Softbank or America Movil is also 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,” Mann added.

As for Three’s future, the analyst said that the operator ran the risk of becoming obsolete, as the market moved towards multi-play.

“A possible option could be to acquire TalkTalk,” Mann suggested. “The broadband and TV provider deploys a similar low-cost strategy and could be available in a cut-price deal having been badly damaged by a recent security breach. 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.”

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