Consolidation in Europe’s Telecom Market Tests Regulators

With proposed deals valued at more than $11 billion, Telefonica SA (TEF) and Vodafone Group Plc (VOD) are laying down a challenge to European regulators who have a history of opposing moves that reduce competition in telecommunications.

Telefonica yesterday agreed to sell its mobile-phone business in Ireland to Hutchison Whampoa Ltd. (13) to create a stronger No. 2 carrier to take on leader Vodafone. Separately, Vodafone announced the takeover of Kabel Deutschland Holding AG (KD8), merging Germany’s biggest cable operator with its own landline and wireless networks to offer combined Internet, TV and mobile services in Europe’s largest economy.

Both transactions will probably be referred to the European Commission, the European Union’s regulatory arm, which last year sought to block Vodafone’s attempt to merge with a rival in Greece and imposed concessions before allowing Hutchison to combine Austria’s third- and fourth-largest wireless operators.

By pushing deals that cut competition, carriers are betting they can set precedents for more consolidation, said Guy Peddy, a telecommunications analyst at Macquarie Bank Ltd. in London.

“From a benchmark perspective it will be very interesting to see how regulators perceive Ireland,” Peddy said. The fact that Hutchison is prepared to go through another antitrust review after its prolonged process to acquire Austrian operator Orange last year shows that “they’re not being put off by it.”

Irish Operators

The combination of Telefonica’s O2 unit with Hong Kong-based Hutchison’s Three brand will cut the number of network operators in Ireland to three from four and create a carrier with a 34.9 percent share of the country’s mobile-phone subscriptions, according to first-quarter data compiled by Dublin-based regulator ComReg. Vodafone was the largest with 40.6 percent, while Eircom had 20.6 percent. The merged companies had 2012 revenue of 803 million euros ($1.1 billion), Three Ireland said.

Robert Finnegan, chief executive officer of Three Ireland, said he expects the purchase to undergo a thorough review to determine whether it’s in line with European competition rules, but that Hutchison is experienced in dealing with regulators.

“The merger will give us the financial strength to be more aggressively competitive,” Finnegan said in a phone interview. While the 850 million-euro deal could lead to expansion of O2’s landline business, “our focus is mobile. That’s where our bread and butter is.”

German Market

Vodafone’s 7.7 billion-euro takeover of Kabel Deutschland would give the carrier access to the German company’s 8.5 million cable households and create a national division with revenue of 11.5 billion euros. Vodafone raised its bid after John Malone’s Liberty Global Plc (LBTYA) made a competing offer, people familiar with the matter have said.

Liberty Global believes a counter-offer is still feasible should it opt to table one, people familiar with the situation said. The company could decide as early as this week whether to walk away or make a counterbid, said one of the people. Marcus Smith, a spokesman for Liberty Global, declined to comment. The company completed a $16 billion acquisition of Virgin Media Inc. in the U.K. this month.

Competition Concerns

Christoph Fritsch, a spokesman for Germany’s Federal Cartel Office, said while the government agency hasn’t received a filing on Vodafone-Kabel Deutschland, it would assess the transaction on its merit. A review on Kabel Deutschland by the European Commission will probably be necessary because the deal exceeds legal limits for revenue, he said. Those thresholds include combined global sales of the transaction parties exceeding 5 billion euros, according to European Union rules.

“We’re watching with interest and we’re glad that players in the sector realize that it’s time for both a single market and new business models,” said Ryan Heath, a spokesman for Neelie Kroes, the EU commissioner in charge of the digital agenda. Heath declined to comment on specific projects. A spokesman for Joaquin Almunia, the EU’s competition commissioner, didn’t return calls and e-mails seeking comment.

Phone companies from Deutsche Telekom AG (DTE) to France Telecom SA (FTE) have seen revenue and cash flow decline for years as customers look for cheaper rates during the region’s debt crisis and network watchdogs order cuts in fees for roaming and interconnection with other providers’ grids.

Joint Letter

CEOs including Telecom Italia SpA (TIT)’s Franco Bernabe, Telefonica’s Cesar Alierta and Royal KPN NV’s Eelco Blok, in a June 14 letter addressed to EU heads of state and Commission President Jose Barroso, asked for a “new regulatory approach” that would ease restrictions on pricing to help the carriers increase revenue and fund investments in their networks.

The 25-member Bloomberg Europe Telecommunication Services Index climbed 0.7 percent today. Telefonica gained 1.1 percent to 9.72 euros in Madrid trading at 9:29 a.m., while Vodafone added 0.2 percent to 176.30 pence in London. Kabel Deutschland increased almost 0.1 percent to 85.54 euros in Frankfurt. Hutchison rose 1.8 percent to HK$78.40 in Hong Kong.

Globally, more than $200 billion in telecommunications deals have been announced in the past 12 months. Of those, European targets accounted for about $38 billion, led by Liberty Global’s deal for Virgin Media, according to data compiled by Bloomberg.

Telecommunications merger and acquisitions in the U.S have picked up since authorities blocked AT&T Inc.’s takeover of Deutsche Telekom’s U.S. business in 2011. Deutsche Telekom has moved on and this year completed a merger of T-Mobile with MetroPCS Communications Inc. Japan’s SoftBank Corp. (9984) plans to complete a takeover of Sprint Nextel Corp. next month.

Next Deal

While phone and cable takeovers in Europe are also picking up, moves such as those by Telefonica and Vodafone are gambles as governments aren’t always consistent in their regulatory positions, said Peter Braendle, who helps manage $60 billion at Swisscanto Asset Management in Zurich.

“Governments all try to be liberal or give the message that they are open for international global transactions,” said Braendle. Yet, moves such as blocking transactions and reducing roaming fees will be tempting because “they are very popular with consumers or with voters,” he said.

Vodafone’s deal to buy Kabel Deutschland will not only challenge Germany’s former phone monopoly, Deutsche Telekom. It will also put pressure on KPN and Telefonica to resume talks about a combination of their German wireless divisions, the No. 3 and No. 4 operators, behind Vodafone and Deutsche Telekom, said Robin Bienenstock, an analyst at Sanford C. Bernstein.

In Italy, Telecom Italia is evaluating a combination of its wireless business with Hutchison’s local unit. Vodafone is considering an acquisition of Fastweb SpA, Swisscom AG (SCMN)’s Italian fixed-line division, people familiar with the matter said this month. Spain’s cable operator Ono may also be a target for Vodafone or another carrier, Bernstein said. A Vodafone spokesman declined to comment on those scenarios.

“Europe is being reshaped, but not by regulators,” Bienenstock wrote in a note. The region “is rapidly moving toward a series of integrated duopolies.”