Dial M for Merger? Jilted by British Telecom, hot-blooded Spanish phone company Telefónica SA calls up Hong Kong-owned Hutchison Whampoa Ltd. and arranges a marriage for its U.K. cellphone business O2 to Hutch's 3 U.K. network in return for a generous dowry of £10.25 billion ($15.4 billion), to help pay off its Latin American gambling debts. Their two remaining rivals are BT Group plc, which has just run off with Deutsche Telekom AG and France Télécom's joint mobile network EE U.K., and Vodafone Group plc . Both ought to be plotting against the engagement in jealous rage. Maybe they could poison the wedding cake with an appeal to the regulators. But instead they may be greedily eyeing a bigger slice of that sugar-coated confection for themselves. OK, so you'd have to be of a certain age to remember that phones once had dials. But the echoes of Alfred Hitchcock's 1954 thriller "Dial M for Murder" (originally filmed in 3D-Warnercolor, giving it some distinctly modern 4G overtones) ring out clear as the bell on an old-fashioned 1950s "telephone set." True, the complexities of the plot may not chime perfectly (not even imperfectly, if the truth be told. But let's not get bogged down in the detail). It would still make a good thriller, with the critics outside the church screaming blue murder as the couple heads up the aisle. They're protesting that the cut in the number of networks from four to a cozy ménage à trois would lead to a cut in competition and an inevitable hike in prices to the consumer. That's not an unreasonable assumption. It is no coincidence that on the day that 02 and Hutchison announced their still tentative agreement, subject to several weeks of exclusive negotiation, regulatory approval and so forth, Vodafone's share price actually rose. Never mind that the deal would combine the second-largest player, 02, with the fourth largest, 3, to leapfrog the others into first place. Never mind that Vodafone would be trailing in last place in its home market. The likely result is that prices and profits would go up for all three remaining players for little additional cost to either Vodafone or BT. Vodafone is no longer quite the swashbuckling disrupter which, back at the turn of the millennium, pulled off what was then the biggest merger in history with the $180 billion takeover of Germany's Mannesmann AG. Today's more mature Vodafone might well be content to sit back and enjoy a gratuitous price increase. It is not even certain that the regulators would try to block the merger. Neither Britain's Competition and Markets Authority nor the European Commission's Competition Directorate was prepared to comment on a deal that has not yet been referred to them. But the size of the companies involved and Hutchison's global business model mean the EC would likely win any turf war over which institution should have oversight of the deal. The British government could reasonably argue that the mobile phone market is essentially a domestic one, but the precedents in Austria, Germany, Ireland and just recently Spain all show that the EC will override any such objection. The same precedents show that the EC has allowed similar consolidation to go ahead elsewhere. The Brussels-based anti-trust unit has accepted the argument that reducing the number of players to three allows the networks sufficient additional profitability to invest in exclusive content for smartphones and roll out 4G and broadband even to the remotest areas. In return, it has demanded concessions such as divestment of radio spectrum to a "potential" new market entrant which might even hope to build its own physical infrastructure. More often, the EC has demanded additional discounted wholesale access to so-called mobile virtual network operators, or MVNOs, who would then piggy-back on the existing networks' infrastructure. In the first of such deals, however, 3 Austria's 2012 acquisition of Orange Austria, the Commission's conditions were reportedly poorly enforced, thus failing to prevent prices rising or to ensure the speedy emergence of new virtual players. Yet there are reasons to wonder if the British experience could be different. The first is that the EC has a new team in place. The incoming competition commissioner, Margarethe Vestager, told The Deal's Renee Cordes in a Jan. 29 interview that she was particularly concerned about the trend to cut the number of mobile network players in each member state to three from four. Vestager, who succeeded Joaquín Almunia in November, added that "from the consumer point of view" it was very important to enhance competition. She has already opened an in-depth review of Orange SA's €3.4 billion ($3.8 billion) acquisition of Spanish fixed-line provider Jazztel plc and could still block it. Another reason is that Britain's quadruple-play market — media companies offer broadband, pay-TV, mobile and fixed-line communications in a bundled package — is beginning to change the shape of the business. Even while it negotiates with Hutchison, Telefónica has agreed to allow Europe's largest pay-TV company, Sky plc, to start selling mobile contracts as an MVNO. BT's acquisition of EE, which BT said it expects to finalize in the coming days, following weeks of due diligence, will also allowed it to offer quadruple play. Meanwhile, cable operator Virgin Media Inc., which provides broadband and fixed-line telephony as well as TV, has long offered virtual mobile contracts, licensed from EE and its predecessor T-Mobile. If quad-play really takes off in Britain — and it is still early days — Vodafone will be the only pure-play wireless network operator left in the market. Then it too might be forced to start looking for partners, possibly even making a bid for Virgin Media. Neither a change of tack by the EC under Vestager nor a triumphant march of the quadruple-play brigade is yet certain. British consumers have so far been much happier than their French neighbors, for instance, to combine the TV and broadband offering of one provider with the cellphones of another. But Vodafone may not be quite as ready as some observers have assumed to sit idly by and watch the additional revenue roll in while former low-tariff player Hutch raises its prices. It might yet try dialing up a merger of its own. Read more from:
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