Virgin and O2’s merger is granted provisional approval

Virgin and O2’s merger is granted provisional approval
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The Competition and Markets Authority (CMA) has granted provisional regulatory approval of Virgin’s proposed merger with O2.

In November last year, the European Commission – which, pre-Brexit, had regulatory oversight over the deal – referred the proposed merger to the UK’s competition regulator.

Andrea Coscelli, Chief Executive at the CMA, said at the time:

“These are incredibly important UK markets, that continue to evolve, and the deal needs to be carefully reviewed to make sure that consumers are protected.

We have worked closely with the European Commission so far and we will build on the work that has already been carried out to make sure that the case can be investigated as quickly and efficiently as possible.”

Today, the CMA provisionally cleared the deal.

A newly-merged Virgin and O2 would be in a position to better compete against BT and EE – respectively the UK’s largest broadband and mobile providers – which also merged in 2016 (a decision that naturally received much scrutiny.)

Kester Mann, Director, Consumer and Connectivity at CCS Insight, commented:

“The blockbuster merger will transform the UK telecoms landscape and create a powerful new converged provider to rival BT.

For customers, the move marks the next step on the UK’s journey toward bundled telecom services. The new company will seek to sell fixed-line and mobile services across both the Virgin and O2 brands, hoping to lock-in customers and drive higher spend.

The joint venture will need to dig deep to fund the costly expansion of cable and 5G services throughout the UK and make tough decisions over its future brand direction.”

The CMA says it was initially concerned that Virgin and O2 could raise prices, reduce the quality, or withdraw entirely the wholesale backhaul services it provides to mobile companies such as Vodafone and Three. Ultimately, these costs would likely be passed on to consumers.

However, an independent panel of CMA members concluded:

  • Backhaul costs are only a relatively small element of rival mobile companies’ overall costs, so it is unlikely that Virgin would be able to raise backhaul costs in a way that would lead to higher charges for consumers.
  • There are other players in the market offering the same leased-line services, including BT Openreach – which has a much greater geographical reach than Virgin – and other smaller providers. This means the merged company will still need to maintain the competitiveness of its service or risk losing wholesale custom.
  • As with leased-line services, there are a number of other companies that provide mobile networks for telecoms firms to use, meaning O2 will need to keep its service competitive with its wholesale rivals in order to maintain this business.

Martin Coleman, CMA Panel Inquiry Chair, said:

“Given the impact this deal could have in the UK, we needed to scrutinise this merger closely.

A thorough analysis of the evidence gathered during our phase 2 investigation has shown that the deal is unlikely to lead to higher prices or a reduced quality of mobile services – meaning customers should continue to benefit from strong competition.”

O2 proposed a merger with the UK’s smallest mobile operator, Three, back in 2015. However, that deal was blocked by the European Commission over competition fears.

Vodafone offers a broadband service that uses connections provided by BT’s wholesale subsidiary, Openreach. The reliance on Openreach means Vodafone doesn’t have as much control as BT/EE or a Virgin-O2 merged entity over both the mobile and broadband services it offers consumers.

However, Three is the real outlier here as the only major mobile provider without any fibre broadband service. Three will be reliant on 5G broadband and has been awarded arguably the most attractive spectrum for providing such services.

Global 5G standards body the ITU states “true” 5G requires 100MHz of 5G spectrum. Three has come under fire for its advertising of being the only provider to offer “real 5G”, but it is the only telco in the UK to meet the ITU’s definition of true 5G. While it’s still early days for the 5G rollout in the UK, Three’s network has been topping speed tests.

Mann added: “The [Virgin and O2] deal could still trigger a ripple effect on the UK market: Further deal-making – potentially including Vodafone, Three and Sky – can’t be ruled out.”

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