Brussels is willing to authorize more mergers of 'telecos'

The European Commission (EC) appears to be more open than before to authorizing mergers of European telecommunications operators with the aim of helping finance the rollout of 5G and upgrading obsolete networks from ADSL to fibre. This change in position can be considered a softening of the EC’s approach after European regulators (the Competition area) annulled several potential integration agreements for companies in the sector in recent years.

The largest telecommunications groups in Europe such as Telefónica, Deutsche Telekom, Orange and Vodafone have been asking the European Commission to help them invest the billions of euros needed for the deployment of 5G and fiber optic networks. (FTTH), and to this end they have asked that consolidation be facilitated in the telecom operator market to achieve scale and, in addition, they have demanded that digital giants (such as Meta, Google, Amazon or Netflix) pay a “fair” contribution (an initiative known as Fair Sharae) for the use of their networks.

According to a draft of the white paper being prepared by the EC to which the Financial Times had access, the EC has considered that the current fragmentation of the telecommunications sector, with hundreds of operators – compared to the big three in the US or the big three in China – could impact operators’ ability to achieve the scale needed to invest in the networks of the future.”

The European regulator noted that, although it recognized that a competitive telecommunications market was a benefit for consumers, “industrial competitiveness and economic security” should also be taken into account when analyzing the consolidation of the sector.

The digital infrastructure report, which will outline Brussels’ future strategy on how to build resilient digital networks, is expected to be published next week and is being reviewed by the EU executive.

Although its recommendations will not be legally binding, telecommunications operators have noted that comments from Brussels indicate that the EU executive is more willing to consider a greater number of mergers in the sector to achieve more scale and help close the funding gap. for the deployment of new networks.

This comes after the Commission noted in 2023 that telecoms operators had indicated they would need to spend up to 50% of their annual revenue over the next five years to invest in new infrastructure.

“The creation of a true single market for telecommunications services requires reflection on how to encourage cross-border consolidation,” Thierry Breton, Commissioner for the internal market and services, told the Financial Times . “Scale is key to achieving the massive investments needed to build the cutting-edge digital infrastructure that Europe needs for its competitiveness. There are still too many regulatory barriers to a true telecommunications single market,” Breton added.

New Commission

The document is expected to revive the debate on the consolidation of telecommunications after years in which the Commission’s main concern about alliances was to prevent mergers from causing an increase in prices for consumers.

In any case, the modification of the merger authorization strategy, softening its requirements and therefore facilitating a new wave of consolidation in the sector, would have to be reflected through the actions of the new European Commission and the new European Parliament that will emerge from the European elections next June. That is to say, although the current Commission can try to put the debate and its new position on telecom mergers on track, the reality is that any implementation of this new policy will have to be carried out by the new EC that emerged from the elections.

Harsh conditions and vetoes

The concerns of the current EC about the effects of mergers on price increases for consumers have in the past provoked a hard line from the EC, especially from the area of competition defense, led for years by Commissioner Margrethe Vestager , which vetoed the sale by Telefónica of its British subsidiary O2 to the Hong Kong group CK Hutchison for 10.5 billion pounds sterling in 2016. But, in addition, the harsh conditions imposed on other operations led to the withdrawal of the merger of the subsidiaries of the Scandinavian telecos Telia and Telenor in Denmark. Or they also caused a sharp deterioration in the profitability of the Italian market by forcing the Italian telecom companies Wind and Hutchison to grant strong remedies to the French company Iliad, which started a huge price war to enter the transalpine market.

One of the latest merger agreements that will be authorized by the current European Commission is that of Orange and MásMóvil, a large-scale operation that will create the leader by customer volume in the Spanish market, dethroning Telefónica, the historical operator. The decision from Brussels, which will be positive, authorizing the merger, will be made public on February 22. And although the remedies agreed upon by the two groups have not been considered the most demanding, the obligation to sell frequencies to another group, the Romanian Digi , will create in the future an even stronger competitor than the Romanian group was. Until now. For this reason, the resolution and remedies applied to the Orange-MásMóvil merger will be scrutinized by the entire telecommunications sector in Europe.

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