Comment: the EU General Court’s decision on Three-O2 deal

EU General Court annulled the European Commission’s decision to block Three-O2 deal – potential implications for in-market mobile consolidation

On 28 May 2020, the EU General Court annulled the European Commission’s decision to block the merger between Three and O2 in the UK, a deal worth £10.25 billion.¹

This judgment is unlikely to resume that deal, after four years from its prohibition, given the recent announcement of O2’s new plans to merge with Virgin Media in the UK. However, the General Court has set a higher bar for the European Commission (Commission) to challenge future similar mergers resulting in a reduction of the number of national mobile network operators (MNOs) from four to three, also called “gap cases”.

The term “gap cases” in competition law parlance refers to anticipated mobile mergers resulting in a significant impediment of competition, although neither creating nor strengthening a single or collective dominant position (unilateral or non-coordinated effects).

The Three/O2 decision was the first merger prohibition ordered by EU Competition Commissioner Margrethe Vestager since she took office in November 2014, and only the second telecoms deal blocked in 25 years, while the 243 calendar days review was the longest before a prohibition decision in 25 years.

Challenging four-to-three consolidation in highly concentrated mobile markets has been a central feature of merger enforcement under Ms Vestager’s watch – with a mobile merger abandoned in Denmark in the face of a prohibition decision and another mobile merger approved in Italy only subject to the entry of a new fourth player.

The General Court’s judgment will be studied closely to see the extent to which it may allow further consolidation in the sector. In addition to the already announced merger plans between O2 and Virgin Media in the UK, financial analysts forecast that this judgment could reignite consolidation attempts in markets with four MNOs, such as France, Italy, Spain and Sweden.

In outline, the following bullet points summarise the main findings of the General Court:

• There is no presumption against four-to-three mergers. Even in such cases, the Commission must demonstrate merger effects that are equivalent to those resulting from the creation or strengthening of a dominant position.
• Two cumulative conditions must be met for a finding of a significant impediment to effective competition in four-to-three mergers –
• 1. The elimination of important competitive constraints that the merging parties had exerted upon each other prior to the merger; and
  2. A reduction of competitive pressure on the remaining competitors.
• It follows that the mere effect of reducing competitive pressure on the remaining competitors (second limb) is not, in principle, sufficient in itself to demonstrate a significant impediment to effective competition in four-to-three mergers.
• The Commission’s reliance, in the annulled decision, on the concepts of ‘reduction of important competitive force’, ‘closeness of competition’, and the quantitative analysis of the effects of the concentration on prices was vitiated by several errors of law and of assessment –

1. 1. Important competitive force. The Commission wrongly assumed that Three was an important competitive force (i.e. it was still a maverick). It failed to demonstrate on the facts that Three stood out from its competitors in terms of its impact on competition (i.e. that it had more of an influence on competition than its market share would suggest, by competing in a particularly aggressive way and forcing other players to follow that conduct). Instead, the Commission simply relied on the findings of an old merger decision in which it had found that Three was a maverick at the time when it had entered the UK market, without checking whether it was still a maverick at the time of the prohibition of the planned merger with O2. The Court found that the mere fact that Three’s offer was cheaper for some and not for all of the market segments was insufficient to demonstrate that it continued to be “capable of significantly changing competitive dynamics”.
   2. Closeness of competition. In oligopolistic markets, more or less all competitors are close competitors to a lesser or greater extent. The Commission failed to demonstrate that Three and O2 were closer competitors with each other than with the remaining market players (i.e. Vodafone and Everything Everywhere). The General Court criticised, in particular, the Commission’s reliance on a survey with a small sample of approximately 100 users for the calculation of diversion ratios between the merging parties. In contrast, the Commission ignored a survey based on 200,000 users demonstrating that Three and O2 were no closer competitors than with the remaining market players, Vodafone and Everything Everywhere.
   3. UPP analysis. The Commission’s reliance on a simple Upward Pricing Pressure (UPP) analysis lacked probative value. Indeed, any four-to-three merger would result in positive price increases based on an UPP analysis. However, four-to-three mergers may also result in long-term efficiencies potentially offsetting short-term price increases. The Commission’s quantitative analysis failed to consider such efficiencies.
   4. Significant impediment of competition test. The Commission’s decision lacked an overall assessment of whether the merger would lead to a significant impediment of effective competition. Instead, the decision was ‘limited to a cursory reference to the body of evidence and circumstances concerning, in particular, the elimination of an important competitive force by the concentration, the closeness of competition and the large market share of the merged entity’ contained in its own Guidelines.
   5. Burden of proof. The Commission had argued that it only had to show that a significant impediment to effective competition is “more likely than not” on the basis of “a balance of probabilities”. The Court rejected this, and found that the Commission must produce sufficient evidence to show a “strong probability” of a significant impediment to effective competition.

• Finally, Three and O2 were each party to network sharing arrangements with Vodafone and Everything Everywhere respectively. The Commission failed to prove its novel theory of harm relating to the impact of the merger on these network sharing arrangements. It maintained that the merger would change the alignment of interests between network sharing partners and thus result in less efficient network investment decisions. The General Court found that the fact that a network sharing agreement may, when it is concluded, result in pro-competitive effects, does not necessarily mean that the termination, renegotiation, or that each subsequent alteration to its balance following a concentration may necessarily be characterised as a significant impediment to effective competition. The Court noted that the Commission should have assessed the long term effects of the merger’s impact on the network sharing arrangements, including taking into a consideration a scenario where there would be further network consolidation in the UK.

In conclusion, the reduction from four to three operators on the wholesale mobile market is not in itself capable of establishing a significant impediment to competition, and it is for the Commission to adduce convincing evidence of this. The General Court found that the Commission had failed to do so in this case.

The Commission now has two months to file an appeal. The EU Court of Justice takes an average of 11.1 months to rule on appeals, although those in competition cases usually take much longer. In the meantime, the General Court’s verdict is the law of the land.

¹Case reference: In Case T-399/16, CK Telecoms UK Investments v Commission, [ECLI:EU:T:2020:217] available at: http://curia.europa.eu/juris/documents.jsf?num=T-399/16