Merging Networks, Diverging Practices: The CMA’s Gamble on Investment Promises & Price Caps in Vodafone/Three

December 19, 2024

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  • In early December 2024, the UK Competition and Markets Authority (CMA) conditionally approved the Vodafone/Three combination subject to a purely behavioural remedy package - a marked departure from the CMA's traditional skepticism with respect to the efficacy of such remedies.
  • A key driver of this shift in approach may have been the UK Government's growth agenda and a desire on the CMA's part to avoid suggestions that it had stymied the creation of a "new force in UK mobile" at a time of European Union (EU) political support for the application of merger control rules in a way that facilitates the creation of "European Champions".
  • Vodafone committed to invest c. £11 billion in infrastructure in order to roll out a combined 5G network over the next eight years (to be overseen by the CMA and Ofcom), and to implement caps on certain mobile tariffs and offer preset contractual terms to mobile virtual network operators (MVNOs) for three years.
  • It remains too early to determine with any certainty whether the CMA's decision in Vodafone/Three really will mark the start of an increased willingness on the CMA's part to accept behavioural commitments (particularly outside of regulated industries) and/or if it will see the CMA's substantive review give increased prevalence to the impact of transactions on national growth.
  • However, the CMA's decision has certainly reignited debate regarding perceived politicization of merger review processes and is sure to see many stakeholders (including European telecoms companies, competition authorities and consumer groups) watching developments closely in the UK to see just how effective the behavioural commitments accepted by the CMA are in practice when it comes to ensuring network capacity and coverage expansion and protecting consumers from material price increases.

Following an in-depth Phase II review process lasting almost 14 months from when the CMA launched its preliminary invitation to comment, on 5 December 2024, the CMA conditionally approved the combination of the parties’ UK businesses into a joint venture. In high-level terms, the impact of this transaction will be to reduce the number of mobile network operators (MNOs) in the UK from four to three. While rejecting the parties’ claims as to the existence of significant consumer benefits that would have offset the potential anticompetitive effects identified by the CMA, as well as the parties’ attempts to head off remedies entirely, the CMA nevertheless cleared the transaction subject to a relatively light touch remedy package. It is noteworthy that the agreed upon remedy package is solely behavioural in nature. At the core of the remedy package is a legally binding commitment to implement an £11 billion network investment programme over the next eight years, which is allegedly poised to boost competition between the three remaining MNOs in the UK in the longer term to the benefit of millions of mobile customers in the UK. Other key elements of the remedy package include a three-year price cap for retail consumers and a three-year commitment to pre-agreed wholesale terms for MVNOs (who rely on wholesale access to the infrastructure of MNOs to provide their own retail offerings).

As such, the Vodafone/Three transaction can be added to the limited number of precedents where the CMA has been willing to approve a deal giving rise to substantive antitrust concerns based solely on a behavioural remedy offering – other examples include: MasterCard/Vocalink (2017) and First Rail/West Coast (2019). Not only is this the first time that the CMA has accepted a solely behavioural remedy package in a telecommunications merger, but it represents a complete volte-face of the position it advocated for in 2016, in the context of another proposed four-to-three telecoms deal in the UK (i.e. Hutchison/O2). In the context of the European Commission (EC) review of that particular transaction, the CMA addressed a letter to the EC (here) in which it advocated strongly for structural remedies (deeming behavioural remedies to be insufficient and ineffective), and noted that absent a structural fix the only viable option available to the EC would be a prohibition. The willingness of the CMA in Vodafone/Three to accept a purely behavioural remedy offering is also in stark contrast to the stance the CMA took in Microsoft/Activision when in 2023, it rejected the behavioural remedy offering proposed by Microsoft (consisting of licensing commitments). The CMA adopted this position notwithstanding the fact that the EC had already concluded that a similar remedy offering was sufficient to fully address its own substantive concerns. It was only after its initial stance came in for heavy criticism (e.g., Activision’s CEO called the UK “closed for business” and Microsoft’s President stated that the decision was “bad for Britain”), and the parties took the decision to substantially restructure the deal (which saw the parties carve out from the scope of the target Activision’s cloud streaming rights outside of the European Economic Area (EEA)), that the CMA was willing to approve the transaction.

The apparent shift in approach on the part of the CMA, when it comes to willingness to accept behavioural commitments, raises the question as to what may have caused this perceived shift. At this stage there appears to be two potential drivers. Firstly, the CMA’s decision in Vodafone/Three attaches great significance to the role of Ofcom (the UK telecoms regulator) when it comes to monitoring and overseeing compliance with the behavioural remedies. The presence of an industry regulator has also been a common feature of other cases where the CMA has been willing to accept purely behavioural commitments and appears to help allay CMA concerns about merging parties circumventing or failing to comply with behavioural commitments. Therefore, going forward, merging parties in regulated sectors with designs on seeking to agree behavioural commitments with the CMA would be well advised to ensure that they onside the relevant regulator as early as possible in the life-cycle of the transaction. The second driver is likely to have been the current pro-UK business and investment agenda of the Labour Government, and the related clear steer given by Keir Starmer to the CMA that it expects the CMA to do more to prioritise economic growth. For example, at an international investment summit hosted by the Government on 14 October 2024, Kier Starmer noted “we will march through the institutions and make sure that every regulator in this country – especially our economic and competition regulators – take growth as seriously as this room does”. This rhetoric has also seeped into public statements made recently by the CEO of the CMA (Sarah Cardell) who has noted that the CMA is “rising to the challenge of growth” and that “we must deliver a regime that leaves no one in any doubt that the UK is open to business”. However, what is not yet clear is whether the first of these factors (i.e. the presence of an industry regulator to police the behavioural remedies) was the main driver, or whether it would be more accurate to view it as the public facing justification for an approval that may have been motivated largely by the second of the above factors and the Government’s desire to support a combined entity with the scale necessary to deliver a best-in-class 5G network across the UK, as well as spurring competition vis-a-vis EE (part of BT Group) and O2 (owned by Virgin Media, a joint venture between Telefonica and Liberty Global). Indeed, but for this deal, the parties had argued that no such investment in infrastructure would be possible, resulting in the UK falling behind its peers in terms of network expansion, coverage, innovation and pricing.

We may gain more insight into the above issues once the CMA has completed a review of its approach to merger remedies that it is due to launch in the new year. It has already been stated that this review will include a consideration of when behavioural remedies may be deemed to be appropriate and, therefore, it should provide further guidance on the extent to which the CMA may be open to accepting purely behavioural remedies in transactions outside of the telecoms and other regulated sectors.

In the meantime, what is certain, is that stakeholders (including European telecoms companies, competition authorities and consumer groups) will be watching developments closely in the UK to see just how effective the behavioural commitments accepted by the CMA are in practice when it comes to ensuring network capacity and coverage expansion and protecting consumers from material price increases. This is particularly true given the experience in certain other EU Member States following four-to-three telecoms mergers. For example, when four-to-three mobile mergers were approved in each of Austria, Germany and Ireland, subject solely to behavioural commitments, prices increased and network roll-out and quality stalled, and the same occurred in the Netherlands when a four-to-three merger was approved unconditionally. As such, these real life examples would appear to suggest behavioural commitments accepted in mobile deals in the past have been largely ineffectual, especially when contrasted with the position in Italy where the EC required a structural remedy as a condition to approving the Hutchison Italy/Wind transaction in 2016 (consisting of spectrum and other assets to France-based Iliad to allow it to enter the Italian market as a new fourth MNO), and Italy now has one of the most competitive telecoms markets in the EU. The EC also required a similar structural remedy in order to green light the Orange/MásMovil four-to-three joint venture in Spain earlier this year.

Finally, it will also be worth keeping an eye on how things progress across the Channel, with there appearing to be two contrasting schools of thought developing. The first is advocating for an application of EU merger control rules in such a way that will encourage – or at least not stymie - the development of “European Champions”, including in the telecoms sector. In contrast, there are certain consumer groups/organisations and bodies within the EU (including the Council of the European Union) that have urged that caution be exercised before further consolidation in the telecoms sector is encouraged due to the detrimental effect it may have on competition in national telecoms markets. The new EC has yet to formally take a position in relation to telecommunications specifically, and all eyes are on next steps following the EC White Paper (see) published in February, outlining various scenarios and policy options to enhance digital infrastructure, focusing on investment, regulatory frameworks and technological advancements. While the document discusses the need for efficient investment and the role of market dynamics, it does not directly encourage or discourage consolidation in the mobile sector.

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