Telefonica O2 and e-Plus merger: MVNO access strengthens competition and wholesale and retail levels

Last week’s approval by the European Commission of the acquisition of e-Plus by Telefonica Deutschland (O2) became possible through concessions at wholesale level. Telefonica committed “to enter into capacity based wholesale agreements with one or several (up to three) Upfront Mobile Bitstream Access MVNOs (“Upfront MBA MVNOs”) in Germany prior to the closing of the merger.” This broadly follows the capacity based MVNO deal offered by Hutchison in Ireland to gain approval for its takeover of O2 Ireland.

Germany already has a vibrant MVNO market, not least as a result of the e-Plus multi-brand wholesale strategy. In regards to the wholesale markets, the Commission is satisfied that these MVNOs will not be harmed by reduced competition at network level. The existence of competitive MVNOs also acts as an insurance against unwarranted retail price hikes and hence alleviates the Commission’s concerns in the retail market.

The merger will take costs out of the mobile industry in Germany so shareholders will benefit. Telefonica Deutschland further committed to “make the following offers: (a) a spectrum offer consisting of the lease of 2×10 MHz in the 2.1 GHz band and of 2×10 MHz in the 2.6 GHz band; (b) a national roaming offer; (c) a divestiture of sites offer; (d) a passive radio network sharing offer; and (e) a sale of shops offer.” An Upfront MBA MVNOs might buy some spectrum. However, the Mobile Bitstream Access effectively provides access to capacity. There is little point in owning spectrum; indeed such a limited spectrum holding would make little sense without immediately entering into a spectrum sharing agreement with Telefónica Deutschland. There is little differences between this and the MBA MVNO arrangement.

Passive infrastructure sharing had been a feature of the German market for some time. Perhaps Vodafone Germany and T-Mobile will also look to increase the sharing of network resources, active and passive with each other and also with the merged Telefonica Deutschland and e-plus. Are we seeing the first steps of an evolution towards a national neutral host network with regulated wholesale prices?

With return of capital employed in the European mobile industry below that of some regulated utilities such as water and gas, investors may be better off by effectively pulling capital out of the mobile industry by means of outright consolidation or through sharing networks including spectrum, i.e. a “merger lite” strategy, becoming regulated utilities.

Noteworthy is that e-Plus was one of the four operators bidding for the 2x30MHz of digital dividend 800MHz spectrum in Germany which did not obtain any block. The outcome of the spectrum auction is likely to have been a factor in KPN’s decision to put e-Plus up for sale. In the next German spectrum auction only three operators will compete for spectrum, probably resulting in auction prices close to reserve prices. This is another reason for investors to be cheerful about the trend towards consolidation in the European mobile industry.

By Stefan Zehle, CEO, Coleago Consulting

Network sharing vs competition in the Czech Republic

Last week, Mobilnet.cz reported that Vodafone CR (Czech Republic) issued a complaint against the radio access network (RAN) sharing deal between Telefonica O2 CR and T-Mobile CR, stating that it breached a rule set down by the Czech Telecommunications Office (CTU) that such arrangements should not be exclusive. So either everyone gets invited to the RAN sharing party or there cannot be any RAN sharing at all.

Blocking a network sharing deal would be bad news for the two operators and ultimately also consumers because it will delay the availability of LTE and increase operator costs. However, allowing two parties to cooperate is likely to produce competitive advantage for the two shares and this is what Vodafone objects to.

The obvious solution is to open the deal to Vodafone as well. This would effectively herald the end of network based competition, at least at RAN level, which is where most of the network cost is. Network sharing is consolidation by stealth which flies under the radar of the EU Competition Commissioner. It is an effective way of taking costs out of the mobile industry.  If Telefonica O2 CR and T-Mobile CR invite Vodafone to the party this would remove the threat of scuppering the deal and may reduce total industry costs further. Return on capital employed could recover for all three operators, while consumers benefit from faster LTE roll-out and better LTE coverage.

By Stefan Zehle, CEO Coleago Consulting

From One to 3 in Austria: Will Hutchison be a consolidator in Europe?

Rumours that Hutchison Whampoa’s 3 Austria is close to sealing a deal to acquire Orange Austria (previously One before being rebranded) for €1.4bn may be good news for the Austrian mobile sector which has seen fierce competition as four operators battled it out in a country of eight million people. It is estimated that in service revenue terms Hutchison has about 6% of the Austrian mobile market while Orange has about 19%. By comparison, Telekom Austria has 44% and T-Mobile has 31 % so the merged entity will still be smaller than its larger competitors.  Although the price seems quite steep at circa 7x EBITDA it may well be justified if 3 Austria can extract hundreds of millions of synergies from the deal by rationalising the networks and avoiding damaging price and subscriber acquisition wars. Post-merger execution will needless to say be critical.

The two other operators in the market (Telekom Austria and T-Mobile) will also benefit and no doubt they will be hoping that the deal is approved by the competition authorities. This might explain, if the press reports are true, why Telekom Austria is so keen to help 3 Austria do the deal by, for example, buying Orange’s discount mobile brand Yesss! as well as some 2.1GHz spectrum and 3,000 redundant base stations. Press reports suggest that 3 Austria will raise up to €300m from these divestments which will lower the overall transaction risk.

In the coming years we expect further mobile network operator consolidation in developed markets as the industry becomes increasingly mature and margins come under further pressure. For Hutchison Whampoa, this represents a new wave of investment in Austria and its 3G business and we wonder if it is not a template to be used in other markets where it is finding the going tough.

Written by Scott McKenzie, Director, Coleago Consulting