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Orange and Masmovil try to steer away from ‘four to three’ in EC prenotification

Orange [EPA: ORA] and Masmovil’s prenotification talks with the European Commission (EC) on their proposed Spanish JV are moving ahead cautiously, with the parties trying to position the deal as not a straight ‘four to three’ concentration, sources familiar with the matter said.

The parties announced a definitive agreement over their EUR 18.6bn tie-up in July last year. Talks were first confirmed in March and the parties have been in prenotification talks with the EC for several months over the deal, which is closely watched by the telco community as a test case for the regulatory environment on in-country mobile consolidation.

Masmovil’s arguments hinge on the view that the deal is not fully a ‘four to three’ as Masmovil’s infrastructure reach is limited, making it fall short of the full definition of mobile network operator (MNO), three sources familiar with the situation said.

According to the first source, the EC is not appearing to be dogmatic around the crucial ‘four to three’ aspect of the deal. Another two sources were more cautious, describing a “neutral” tone of conversations, with one of them adding that the EC was yet to give feedback around the ‘four to three’ aspect.

Masmovil is also stressing that the Spanish telco market is a dynamic and competitive one, with at least eight competitors for mobile offers and a lively mobile virtual network operator (MVNO) scene.

There are 35 MVNOs in Spain and 18 have over 50k clients, one of the three sources noted, adding that eight operators offer services throughout the country with revenues of at least EUR 100m. Avatel, Digi [BVB:DIGI] and Finetwork are all growing despite not having any infrastructure, this source noted.

Romania-based Digi, which holds 8% of the mobile subscription market, stands out as an aggressive and fast-growing competitor, which has been vocal about its intentions to take up any remedy offer stemming from the review, according to one of the sources.

Other factors that Masmovil is highlighting are bundled offers (fixed-mobile convergence) – which are particularly popular in Spain, and Telefonica’s [BME:TEF] strong presence is also an element which should play in favour of the parties, the sources added.

In Spain, Orange and Masmovil, together with Vodafone [LON:VOD], compete against incumbent Telefonica. According to 2021 data by the Spanish competition authority CNMC, Orange had 22.6% of the mobile space, while Masmovil had 20%, Telefonica’s Movistar had 28.1% and Vodafone 22%. In landlines, Telefonica had 42.7%, Vodafone 20%, Orange 19.9% and Masmovil 13.7%. Figures for mobile internet were 27.2% (Telefonica), 25.3% (Vodafone), 22.5% (Orange) and 17.6% (Masmovil).

Dutch case similarities?

A similar argument about a deal not being a straight four to three case was made in the takeover of Tele2 NL by T-Mobile NL in 2018, a sector competition lawyer noted. The deal went through a protracted EC investigation, with a statement of objections (SO) and an oral hearing and, in a rare turn of events, was cleared unconditionally.

However, the similarities between the Spanish JV and the Dutch deal might not be very high, the lawyer cautioned. Tele2 like Masmovil did not have a lot of spectrum and relied on network sharing with T-Mobile, the lawyer noted. But in the Dutch case, the deal only generated a small increment in market share, giving T-Mobile NL 25% of total mobile subscriptions, the lawyer said.

Masmovil/Orange seems more in line with other ‘four to three’ mergers examined by the EC, with the creation of a relatively large company with a significant market share increment, the lawyer said. Based on the abovementioned data, the parties would end up controlling over 40% of mobile subscriptions.

While cautioning that every review has case-specific elements, the lawyer also noted that the EC tends not to buy arguments of MVNOs being competitors to MNOs, at least judging from past practice. In the Tele2 case, the EC initially wanted an MNO remedy, despite Tele2 also being weak on infrastructure, the lawyer said.

Country-specific factors, such as the popularity of bundled offers – which is a characteristic of the Spanish market – could play in favour of the parties, although there is no blueprint for this in previous decisions, the lawyer said.

Remedies and filing

As with every review, the key question is what kind of remedy could work to get the deal through, said the lawyer. Wind Tre/Hutchison (2018) offered an example of a strong remedy, allowing Iliad’s Free to enter the market.

Free’s entry created a ‘bloodbath’ on the national market, with existing players suddenly faced with very competitive offers and Hutchison’s market share plummeting, the lawyer recalled. This leaves an open question on whether telcos would have any appetite to replicate that situation, the lawyer said.

Conversations around remedies in the Masmovil case are not yet happening, the first source said, while the second source said the parties are likely to start designing remedies and looking for remedy-takers around the end of February.  

The remedies can be cut different ways, the second source said, explaining that they could involve mobile infrastructure, landlines, wholesale, FTTH. The parties are ready to cope with “small” remedies, added the third source.

The parties plan to notify the deal to the EC in the first quarter of 2023, Jean-François Fallacher, CEO of Orange in Spain was reported to have said in October.

A filing is not imminent, the first source said, while the second and third sources pointed to mid-February as potential filing timing. The parties are readying a second draft Form CO after a first one was submitted in early October, the second source added.

Long prenotification talks are definitely not surprising in complex mergers, the lawyer said. There are generally several draft Form COs before a formal filing, the lawyer added, noting that a second form CO does not sound as if the parties are particularly advanced, or close to notification.

Generally the draft forms are amended each time the parties receive and respond to an RFI round, and there are generally several RFIs – more than two – even in a simple case, the lawyer said. Not all RFIs are of the same length and breadth, however, so it is possible to have  two long RFIs or more shorter ones, the lawyer said.

A final judgment from the European Court of Justice (ECJ) on the UK Hutchison/O2 case, which is viewed as an indication on EC mobile merger review policy, is awaited in the first half of this year. An opinion by Advocate General Kokott in October largely sided with the EC’s prohibition, suggesting that the EC’s policy might not see major changes in the near future.

Orange and Masmovil declined to comment.

An EC spokesperson said: "This transaction has not been formally notified to the Commission. If a transaction constitutes a concentration and has an EU dimension, it is always up to the companies to notify it to the Commission".