The General Court has annulled the European Commission’s decision of May 11, 2016, in which it blocked the proposed acquisition of Telefonica UK (O2) by Hutchison 3G UK (Three). The General Court found that the Commission failed to prove that the merged company would harm competition or raise prices and that it had made several errors of law and assessment in its review. While the ruling will be welcomed by the telecoms industry that continues to consolidate, the General Court’s guidance on the EU Merger Control Regulation will be relevant for other mergers and acquisitions, particularly in oligopolistic markets (e.g. four-to-three transactions) where the merger does not result in the creation or strengthening of a dominant position.

Background

The Commission prohibited the acquisition based on the following theories of harm (i.e. concerns) based on non-coordinated effects (also known as unilateral anticompetitive effects) arising from the proposed acquisition:

• The retail market for mobile telecommunication services – the acquisition would have eliminated competition between two powerful players on the UK mobile telephony market. It was considered that Three was an “important competitive force” whereas O2 had a strong market position. The Commission considered that the merged entity would be a less aggressive competitor for retail customers. Elimination of these competitive constraints would have led to an increase in prices for mobile telephony services in the UK and a restriction of choice for consumers. At the time of the review, there were four mobile network operators: EE, O2, Vodafone, and Three.
• Retail market relating to network sharing – the acquisition would have likely negatively influenced the quality of service. One particularity of the UK market was that EE and Three, on one hand, and O2 and Vodafone, on the other, had shared their networks through network-sharing agreements. This allowed the companies to share the costs of rolling out their networks while continuing to compete at the retail level. The acquisition would have resulted in the merged party having an interest in both network sharing agreements, which it could use to weaken its competitors by degrading the network quality.
• Wholesale market – the acquisition would have eliminated important competitive constraints in the wholesale market. The four mobile network operators provided hosting services to other “virtual” operators like Virgin Media, Talk Talk, and Dixons. Elimination of Three as an “important competitive force” would have resulted in a reduction in the number of the host mobile networks thus placing the virtual operators in a weaker negotiating position to obtain favourable wholesale access conditions.

The Commission also rejected alleged efficiencies resulting from the acquisition as they were not verifiable, were not specific to the concentration and were unlikely to benefit consumers. Similarly, the Commission rejected the proposed commitments offered by the parties as they did not eliminate the competition concerns identified and were not comprehensive and effective in all respects.

Judgment

This is the first time when the EU Courts have given a ruling on the interpretation of the “significant impediment to effective competition” test (also known as the SIEC test). The General Court accepted that the SIEC test allows to prohibit mergers in oligopolistic markets if they give rise to a SIEC, even if they do not result in the creation or strengthening of a dominant position.

However, the General Court emphasised that the SIEC test “must be interpreted as allowing the Commission to prohibit, in certain circumstances, on oligopolistic markets concentrations which, although not giving rise to the creation or strengthening of an individual or collective dominant position, are liable to affect the competitive conditions on the market to an extent equivalent to that attributed to such positions, by conferring on the merged entity the power to enable it to determine, by itself, the parameters of competition and, in particular, to become a price maker instead of remaining a price taker” (emphasis added).

In respect of non-coordinated effects, the General Court held that the acquisition must involve cumulatively (i) the elimination of important competitive constraints that the merging parties exerted on each other; and (ii) a reduction of competitive pressure on the remaining competitors. The General Court noted that the mere effect of reducing competitive pressure on the remaining competitors was not sufficient to show a SIEC on the market in the context of a theory of harm based on non-coordinated effects.

On the burden of proof, the General Court held that the Commission must produce sufficient evidence to demonstrate “with strong probability” the existence of a SIEC following the acquisition. In other words, the standard of proof is above “more likely than not” but below “beyond all reasonable doubts.” For example, in this case, the Commission failed to show to demonstrate with a “sufficiently high degree of probability” that the quantified price increase would be “significant” following the elimination of the important competitive constraints which the parties to the acquisition exerted upon each other.

In respect of Three being identified as an “important competitive force,” the Court found the Commission erred in law and assessment in finding that “an ‘important competitive force’ does not need to stand out from its competitors in terms of impact on competition, particularly in so far as such a position would allow it to treat as an ‘important competitive force’ any undertaking in an oligopolistic market exerting competitive pressure.” The mere decline in the competitive pressure which would result from the loss of an undertaking having more of an influence on competition than its market share would suggest is not sufficient, in itself, to prove a SIEC.

The Court also reminded that the “competition rules are primarily intended to protect the competitive process as such, and not competitors.”

The Commission has two months and 10 days to decide whether to appeal the judgment.

Please do not hesitate to reach out to the members of our competition team if you require a more depth analysis of how the judgment could affect your transaction or other consolidations in the relevant markets.