The EU Court annuls the prohibition of Three UK / O2: towards a new era for EU merger control?
On 28 May 2020, the General Court issued a landmark judgment in case T-399 CK Telecoms UK Investments v Commission by annulling the Commission’s merger control decision prohibiting the proposed acquisition of Telefónica Europe Plc, which operates in the UK under the brand O2 UK (“O2”), by CK Hutchison Holdings Limited through its indirect subsidiary Hutchison 3G UK Investments Ltd (“Three”) (decision M.7612 of 11 May 2016).
This transaction was a ‘four-to-three’ operation that would have created a leading (but not dominant) player in the UK mobile telephony market, facing competition from Everything Everywhere (“EE”), belonging to British Telecom, and from Vodafone, with market shares as indicated in the table below:
|Three + O2||Around 40%|
|EE||30% - 40%|
|Vodafone||20% - 30%|
Unsurprisingly, Hutchison brought an action before the General Court seeking annulment of the Commission’s decision.
The resulting judgment is key for two reasons.
Firstly, even though the General Court has reviewed a number of the Commission’s merger control decisions in recent years, the last major annulment judgments for substantive issues date back 18 years ago with the judgments in the Airtours/First Choice, Schneider/Legrand and Tetra Laval/Sidel cases, where the Commission blocked the transactions. Back at the time, this prompted major reform within the DG COMP, with the abolition of the Merger Task Force and the reallocation of merger control by sectors.
More precisely, it is the first European Court ruling on the ‘significant impediment to effective competition’ test (the “SIEC test”) as introduced in Article 2(3) of the Merger Regulation back in 2004. It also raises the standard of proof imposed on the Commission when the latter concludes, on the basis of one or several theories of harm, that a concentration raises competition issues.
Secondly, it takes place in the telecom sector, where the Commission has been criticised for having adopted a strict approach to ‘four-to-three’ mobile deals. This attitude is thought to have prevented industry consolidation - which would have brought benefits to European consumers.
The interpretation of the SIEC test by the General Court
It is worth recalling that the SIEC test was introduced in 2004 to capture competition issues potentially raised by mergers in oligopolistic markets, i.e. in situations where there was no creation or reinforcement of a dominant position (which was previously the only basis for blocking a merger).
The question raised by Three was whether the Commission has broadened the SIEC test too far, as the Commission has been free to apply it over the last 16 years in the absence of an EU court ruling on the applicable criteria.
The General Court held that the new SIEC test did not lower the intervention threshold for the Commission and held that non-coordinated effects (i.e. unilateral effects) can only lead to a SIEC if they produce effects “equivalent” to the creation or strengthening of a dominant position (§90). The General Court held further that Recital 25 of the Merger Regulation sets two cumulative requirements to establish a SIEC test based on non-coordinated effects: (i) that the concentration will lead to the elimination of important competitive constraints between the merging parties and (ii) a reduction of competitive pressure on the remaining competitors (§96).
A new standard of proof
According to the judgment, the standard of proof must be the same for unilateral effects and coordinated effects. Otherwise, the General Court makes the (quite strong) statement that the Commission would classify the facts of a case in such a way as to benefit from the most favourable rules of evidence (§109). It also does not matter that the Commission’s theories of harm can be complex: this has no impact on the standard of proof (§110).
The General Court then adds that the Commission’s theories of harm must appear ‘sufficiently realistic and plausible’ (§117) (i.e. not purely theoretical) and that the Commission must demonstrate a ‘strong probability’ of the existence of significant impediments following the transaction (§118), whereas the Commission considered that it was enough to demonstrate that the theory of harm was ‘more likely than not’, on the basis of the ‘balance of probabilities’.
The General Court hence raises the bar of the standard of proof to a ‘strong probability’ level which remains less strict than ‘being beyond all reasonable doubt’ (§118) but nevertheless will require the Commission to investigate cases further than before when it wants to conclude that a concentration raises competition issues, on the basis of one or several theories of harm.
Having stated these clarifications, the General Court then severely criticises the Commission’s theories of harm in its decision, as the Commission either applied the wrong criteria or failed to meet the requisite legal standard of proof.
The Commission’s three theories of harm in its decision of May 2016
In its decision of over 700 pages, the Commission identified three theories of harm on the basis of which it blocked the transaction:
- Firstly, on the retail market for mobile telecommunication services in the UK, the transaction would have led to an increase in prices and a restriction of choice for consumers;
- Secondly, on the retail market relating to network sharing in the UK, the transaction would have hindered the development of mobile network infrastructure; and
- Thirdly, on the wholesale market, the transaction would have negatively impacted ‘virtual’ operators on the UK mobile telephony retail market.
In addition, the Commission noted that the efficiencies were not verifiable, not specific to the concentration and were unlikely to benefit consumers. The Commission also rejected the remedies proposed by Three.
The first theory of harm: non-coordinated effects in the retail mobile telephony market
The Commission considered that the transaction would have eliminated competition between two strong players in the UK mobile telephony market, one of which, Three, would have been an important driver of competition and the other, O2, would have held a strong position: together, the two would have been market leaders with a market share of around 40%.
Having said that, the mere analysis of the market shares is a first indication but, as rightly stated by the Commission, this is not enough. The Commission relied more particularly on (i) the concept that Three was an ‘important competitive force’ within the meaning of paragraph 37 of the Horizontal Guidelines; (ii) the concept of closeness of competition between the merging parties; and (iii) an econometric upward pricing pressure analysis. However, the General Court found that the Commission failed to meet the requisite burden of proof in all respects.
The concept of ‘important competitive force’
As regards the elimination of an ‘important competitive force’, the mere decline in competitive pressure is indeed not sufficient, as the Commission claimed in its decision. Quite the contrary, the General Court stated that this concept means that the ‘important competitive force’ must ‘stand out from its competitors in terms of impact on competition’ (§171).
Otherwise the Commission could easily, by that fact alone, prohibit horizontal concentrations in such oligopolistic markets, since the Commission will always be able to identify a decline in competitive pressure in concentrations in oligopolistic markets. This would imply the elimination of an ‘important competitive force’ which would then amount to the elimination of an important competitive constraint which, in turn, would justify a finding of a significant impediment to effective competition (§172).
In addition, the General Court concluded that the other factors analysed by the Commission to support its first theory of harm were not sufficiently demonstrated to conclude that Three was an ‘important competitive force’:
- The ‘gross add share’ (i.e. the share of new customers won) for Three was between 10 and 20%, which was very low;
- The strengthening of Three’s market shares over several consecutive years was not conclusive;
- The Commission’s statement that Three’s prices were ‘among the lowest in the market’ and ‘among the cheapest for [the] low data segment’ fell far short of proving that this pricing policy is capable of significantly altering competitive dynamics on the market; and
- Three’s marketing initiatives were historical in nature;
The concept of closeness of competition
The evidence used by the Commission – internal documents, diversion ratios and a survey – showed that Three and O2 were merely ‘close competitors’ to each other (and to the other two mobile network operators) but not ‘particularly close competitors’ to each other as implied by Recital 25 of the Merger Regulation (§242). In fact, in oligopolistic markets, competitors are by definition always close to each other to a greater or lesser extent.
The Commission’s upward pricing pressure (“UPP”) analysis lacked probative value
Finally, the UPP analysis failed to demonstrate with a sufficient degree of probability that prices would increase ‘significantly’ following the elimination of the important competitive constraints which the parties to the concentration exerted upon each other. The Commission itself had noted that the UPP test was not meant to be a precise quantification of future price increases, but rather an indication of the likelihood of price increases (§267). It is also interesting to note that, according to the General Court, the Commission should have included ‘standard efficiencies’ (for instance, from the rationalisation and integration of production and distribution processes by the merged entity) in its quantitative analysis, otherwise such analysis is incomplete (§278).
The General Court made it clear though that these are not the same type of efficiencies within the meaning of the Horizontal Guidelines, which are taken into account in the overall competitive appraisal of the concentration, in order to ascertain whether they are likely to counteract the restrictive effects of the concentration.
The second theory of harm: the impact of the transaction on infrastructure development
The current four mobile network operators in the UK were parties to two network-sharing agreements that enabled them to share the costs of rolling out their networks while continuing to compete at the retail level: Three and EE with MBNL on one side, and O2 and Vodafone with Beacon on the other side.
According to the Commission, the merged entity would be party to both network-sharing agreements and EE and Vodafone would no longer have a fully committed partner in their respective shared networks, resulting in higher costs and/or lower quality for EE and Vodafone, thereby reducing their ability and incentives to compete post-merger (§298-299).
Even though this is a novel theory of harm, that does not mean that it is unfounded. However, the General Court states that even if these network-sharing agreements can have positive effects, that does not mean that the termination, renegotiation, or any subsequent alteration to their balance following the transaction,’ may necessarily be characterised as a significant impediment to effective competition (§340). Rather, it is simply a new situation that needs to be analysed.
Here again, the General Court found that the Commission jumped too quickly to a conclusion: while its second theory is not only not plausible, the Commission did not analyse the effects of the transaction in the form of a degradation of the services offered by the merger entity or the quality of its own network, and did not even consider the probable reaction of EE or Vodafone in case of an increase in their network costs or degradation of network quality (§§358, 372 and 396).
The third theory of harm: not big enough on the wholesale market
According to the Commission, the loss of Three as an ‘important competitive force’ and the ensuing reduction in the number of host mobile networks would have placed virtual operators in a weaker negotiating position to obtain favourable wholesale access conditions.
However, the General Court considered that neither the wholesale market shares held by Three (between 0 and 5%) nor their recent increase are, here again, enough to state that Three is an ‘important competitive force’. The mere fact that Three had a greater influence on competition than its market share would suggest it is not sufficient to establish the existence of a significant impediment to effective competition.
Conclusion: what is to be taken from the judgment?
It follows from this judgment that the Commission will have to raise its standards to meet the SIEC test in order to prove with a ‘strong probability’ the existence of significant impediments following the concentration. This judgment limits the Commission’s ability to prohibit mergers in oligopolistic markets, on the basis of somewhat vague qualitative findings of an ‘important competitive force’, closeness of competition and the probability of a price increase.
It remains to be seen if the Commission will appeal, and whether such an appeal will be successful.