Almunia approves Telefónica’s German merger

Telefónica won approval with commitment to help new competitors enter the market, despite bitter opposition from Germany’s competition authority, among others.

Telefónica’s €8.6 billion bid for E-Plus, the German unit of Dutch telecoms company KPN, was approved yesterday (2 July) by the European Commission, despite unprecedented opposition from national competition authorities.

The Commission initially expressed concern that the deal, which would merge Germany’s third and fourth- largest operators, would raise prices. But it accepted commitments from Telefónica to stimulate additional competition. To do so, Telefónica has promised to lease network capacity to allow up to three new competitors to enter the German market before closing the deal and it has offered to sell infrastructure to a company that wants to operate its own network.

“Consumers will continue to enjoy the benefits of a competitive market,” said Joaquín Almunia, the European commissioner for competition, presenting the decision yesterday.

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The Commission’s decision is controversial. When it presented the draft approval to a meeting of national competition authorities (NCAs) in early June, known as the competition advisory committee, five of the 12 NCAs present opposed the proposal. Just two NCAs voted in favour of it.

The rebellion was led by the German Bundeskartellamt, whose request to review the deal, which only involves the German market, was rejected by the Commission. Competition authorities from the United Kingdom and Italy sided with the Bundeskartellamt, as did the Austrian and Irish competition bodies – both of which are displeased with the conditional approvals given by the Commission for ‘four-to-three’ merger deals in their national markets.

Alec Burnside, a competition lawyer at ‎Cadwalader, Wickersham & Taft, said it was very unusual for the Commission to proceed without the support of the advisory committee. “On other occasions, it has moved mountains to get the committee’s support, even holding two additional meetings when reviewing the 1997 merger between Boeing and McDonnell Douglas,” he said.

Telecoms executives and politicians including Angela Merkel, Germany’s chancellor, have put pressure on Almunia, to take a more permissive stance on telecoms mergers. In the face of intense competition and market fragmentation, incumbent telecoms companies have been unable to invest in upgrading infrastructure to meet users’ burgeoning internet demands, they argue.

Almunia has in the past argued that relaxing competition rules to allow consolidation within markets would lead to higher prices for consumers. “What is needed most of all is to eliminate the remaining national barriers,” he said yesterday. “It is for national governments and the European Parliament to push for the elimination of remaining barriers in order to complete the single telecoms market.”

But some practitioners  worry that the competition rules are being relaxed. Antonios Drossos, managing director of Rewheel, a management consultancy focused on telecoms and based in Finland, says that the Commission has “succumbed to political interference” and predicted that the commitments will prove “ineffective”.

The approval could well trigger further rounds of mergers and acquisitions in the EU’s telecoms markets. The share prices of EU telecoms companies have risen steadily over the last year in anticipation.