16 February 2024

For years, the European Commission has resisted consolidation but are we about to see a new direction in favour of scale?

The Commission’s highly anticipated white paper on how Europe can build resilient digital networks is not due to be revealed until next week (21 February), however, leaks suggest that there may be a major directional change in merger policy.

Historically, the Commission’s focus has been on preserving competition and the benefit that it brings to consumers. This has manifested itself in mergers either being refused (e.g. the Nowo-Vodafone merger in Portugal) or remedies being required to get them through. Often these remedies have required the merging entities to divest substantial assets – typically spectrum and/or sites and/or business units – to a new entrant. An entrant may be good for competition and consumer choice, but it can significantly dilute or eliminate the desired merger benefits.

However, in the draft white paper, the Commission appears to suggest that “fragmentation [of the sector] could impact the ability of operators to reach the scale needed to invest in the networks of the future, in particular in view of cross-border services”. It appears that bridging the investment gap to deploy next-generation networks may now be a more pressing issue for the Commission.

Why do European telecoms operators want consolidation?

Put simply, they have been under financial strain for years. Mobile operators have had to invest in new technologies to meet the rapidly growing data demand, whilst fixed operators are facing huge costs to deploy fibre. However, consumers have been reticent to pay more for these new services and competition in Europe has kept prices down.

The operators claim that they are sub-scale and European markets are too fragmented. In its white paper, the Commission acknowledges that there are more than 50 mobile and 100 fixed operators in the EU.

Mergers can lead to savings in the hundreds of millions. For example, the Wind-Tre merger in Italy foresaw cost savings of up to EUR 700m each year and the proposed Orange-Masmovil merger expects EUR 450m in annual synergies after three years.

What have been the consequences of merger remedies?

A long-running debate has been whether four players is too many in mobile markets of the size found in Europe. Notably, the USA only has three national mobile operators.

There have been numerous recent attempts by mobile operators to merge in four-player markets – Orange and Masmovil (Spain), Vodafone and Three (UK), and Nowo and Vodafone (Portugal). Notably, the latter was recently rejected in its proposed form.

At the same time, a wave of new entrants has been seen – Iliad Italy, Citymesh & Digi in Belgium, Digi Spain, and 1&1 in Germany, to name a few. Market entry has often been facilitated by these entities being the recipients of merger remedies. Iliad launched in Italy in 2018 having received both spectrum and sites as a result of the Wind-Tre merger in 2016.

Whilst these remedies have stimulated market competition and entry, they may have nullified parts of the synergy advantages sought by the merging MNOs. Where a new entrant has too much assistance to enter the market, incumbent operators will struggle to compete. Iliad Italy, for example, aggressively priced its services and undercut the market. It has gained 12% subscriber share in five years and nationwide ARPU has significantly reduced. Citymesh & Digi in Belgium managed to acquire 110MHz spectrum reserved for a new entrant and the joint venture is set to launch later this year.

In contrast, Drillisch (later merged with 1&1) in Germany received access to a wholesale capacity deal following Telefonica’s acquisition of E-Plus in 2014 as well as the right to a spectrum lease. However, it is now facing the prospect of being excluded from a spectrum renewal process – putting its multi-billion Euro investment at risk.

All eyes on the Commission’s white paper

The big question is thus: whether the white paper will give clearer direction on how Europe’s regulators will assess in-market consolidation in the coming years. Telecoms operators are still facing significant pressure to close any remaining coverage gaps by deploying new technologies while receiving little reward in the way of increased revenues.

Notably, the ambition here is for in-market consolidation, which is very different from cross-border consolidation, where the expected synergies for operators will be lower. Notably, any attempts to foster cross-border consolidation would also go against recent trends in Europe, where multi-national operators have divested parts of their portfolio to private investors.

In this complex situation of competing interests, it will be fascinating to see which direction the white paper ultimately recommends…