The European Commission has cleared under the EU Merger Regulation the proposed acquisition of UK telecommunications company O2 by the Spanish telecommunications company Telefónica. The Commission was concerned that the acquisition would result in distortions of competition in the market for international roaming services, in particular in the UK. In order to remove the Commission's concerns, Telefónica has undertaken to leave the FreeMove alliance. In light of this commitment, the Commission has concluded that the transaction will not significantly impede effective competition in the European Economic Area (EEA) or any part of it.
Telefónica and O2 are both telecommunication network operators. While Telefónica's activities include both fixed and mobile telephony, O2 is only active in the mobile telephony sector. Telefónica provides its services in Spain and in the Czech Republic. O2 is active in the UK, Germany and in Ireland. Apart from retail telephony for end-customers, both companies offer call termination and international roaming services to other telecommunication companies.
Competition concerns
The Commission's market investigation identified concerns closely related to the functioning of the alliances of network operators created to improve international roaming services.International roaming is the ability of mobile phone subscribers to use their phones whilst travelling abroad. Users can make and receive calls using the same number as they do at home.
Telefónica is currently a member of the so-called FreeMove alliance, where it co-operates with the other three largest incumbent network operators in the EEA (France Télécom, France; Telecom Italia, Italy; and Deutsche Telekom, Germany). O2 participates in the Starmap alliance, where a range of smaller telecommunication companies co-operate under a similar but albeit more loosely structured framework.
The Commission found that the merger would therefore give rise to competition concerns on the market for international roaming services. At the wholesale level, telecommunication companies buy international roaming from each other in order to allow their mobile telephony subscribers to make and receive calls while travelling abroad. In particular, the FreeMove alliance was founded in order to concentrate the exchange of international roaming business among its members.
The Commission's market investigation showed that following the proposed transaction, O2 would in the normal course of events be expected to move from the Starmap alliance to the FreeMove alliance, or align its behaviour with that of the latter, as a consequence of its dependency on Telefónica. As a result, O2 would in all probability be less ready to exchange international roaming traffic with non-FreeMove members. This would imply significant cost increases for those companies, in particular in the UK where no international roaming provider independent of FreeMove would remain after the transaction (except for the fully integrated Vodafone group).
Commitments
To address the Commission's concerns and in order to avoid an in-depth investigation, Telefónica committed itself to leave the FreeMove alliance as soon as possible and not to re-enter that alliance without the Commission's prior consent in the coming years. With the termination of its alliance membership the serious doubts outlined above are removed and the Commission can approve the merger.
In the meantime, the Commission is continuing its own-initiative inquiry, opened in 2004, into Starmap and FreeMove to ensure that that they are compliant with EC Treaty rules on restrictive business practices (Article 81).
