There is no magical number when it comes to “4-to-3” telecom mergers. On 28 May 2020, the EU’s General Court (“Court”) handed down a landmark judgment annulling a 2016 decision of the European Commission (“Commission”) blocking the merger between O2 UK and Three.
The judgment fine-tunes the Commission’s application of the “significant impediment to effective competition” test for horizontal mergers and raises the bar for proving the removal of an “important competitive force” as a result of the merger.
According to the Court, it does not suffice for the Commission to point to just any company in an oligopolistic market exercising competitive pressure. Instead, a company has to stand out from the crowd by, for instance, competing in a particularly aggressive way, forcing other players to follow.
The ruling shows it is worthwhile for companies in concentrated markets to keep a close watch on the Commission’s theories of harm and economic evidence when it assesses their contemplated horizontal merger.
In 2016, the Commission had blocked the merger between O2 UK (a subsidiary of Telefónica) and Three (a subsidiary of CK Hutchison Holdings), arguing that the transaction would eliminate a close competitor and lead to higher prices for consumers and reduced competition on the wholesale market for access and call origination on public mobile networks. The Commission also considered that the merger would have had negative effects on the merging parties’ partners in network sharing agreements, under which parties seek to pool parts of their network; a practice common in the telecoms sector.
The case is one of the rare successful challenges to a Commission prohibition under the 2004 merger test requiring the Commission to show a “significant impediment to effective competition” (SIEC), rather than the more exacting “dominance” as required under the previous test. The SIEC test enables the Commission to also catch mergers which, although not giving rise to dominance, result in unilateral (non-coordinated) effects; allowing the merged entity to determine, by itself, the parameters of competition.
To determine a merger’s unilateral effects, the Commission needs to show (i) that the merger removes an important competitive force, and (ii) that the competitive pressure on the remaining competitors is reduced. The test has been criticised over the years as providing an unclear yardstick for Commission interventions in merger control, which were regarded as increasingly intrusive.
The judgment states that the mere effect of reducing competitive pressure on the remaining competitors is insufficient to prove an SIEC. Particularly in concentrated, oligopolistic markets, the Commission must show that the merger removes a competitor that “stands out” from its competitors in terms of its impact on competition.
The Court also held that the Commission must evidence significant impediments to competition with a “strong probability”. When relying on closeness of competition in concentrated markets, the Commission must show that the parties are ‘particularly close’ competitors, rather than merely ‘close competitors’. The Court in particular criticised that the Commission focused on showing that all parties in a highly concentrated market were ‘close competitors’, whereas it should have identified elements proving the specific closeness of competition between the merging parties. This significantly increases the burden on the Commission, which has routinely challenged 4-to-3 concentrations, in particular in the telecoms sector.
Finally, the judgment is a reminder that a finding of an SIEC must be based on specific findings identifying the exact basis on which the Commission concludes that these effects are “significant”; general references to high market shares, closeness of competition or the elimination of an important competitive force are insufficient.
The Commission said it was “urgently” reviewing the judgment, and it may appeal. In the meantime, the judgment has brought much-needed clarity to the Commission’s merger control review powers and significantly increases the evidentiary burden on the regulator. It also confirms a wider trend in recent case law requiring the Commission to closely analyse and specifically prove the alleged anti-competitive effects in a case.
Companies should carefully analyse this judgment, which may have increased the burden for the Commission to challenge mergers, in particular in concentrated markets.
This article was published in the Competition Newsletter of June 2020. Other articles in this newsletter: