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February 4, 2016updated 04 Sep 2016 10:33pm

Three and O2 customers get price freeze promise after Ofcom slams merger

News: Hutchinson Whampoa Chairman tries to pre-empt objections to the deal from the European Commission.

By Alexander Sword

Three owner Hutchinson Whampoa has responded to recent fears about its take-over of Telefonica’s UK network O2 with a series of pledges, including a price freeze.

Hutchinson’s Chairman Canning Fok said that a price freeze covering voice, texts and minutes would be in place for five years following the merger in a letter to the Financial Times.

Fok also promised that the company would invest £5 billion in UK businesses over five years, which he claims is 20 percent more than would have been invested if the companies were separate.

The letter argued that the effect of this spending would also be multiplied due to the added efficiencies of the combined company.

The third pledge would see the combined operator offering fractional shared ownership interests in its network capacity. Fok argues that this will "eliminates the tricks some wholesalers use to disadvantage their wholesale customers and thus make it harder for them in turn to make competitive offerings to their own customers".

Hutchinson’s taking to the offensive on the matter comes in the same week that UK regulator Ofcom’s CEO Sharon White claimed that the deal would damage competition in the UK.

Neither Ofcom nor the UK’s Competition and Markets Authority will have a say over the deal since not enough of the business of the two companies is conducted there.

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However, there are signs that the European Commission, which will decide the case, is taking a harder line after the 2013 merger in Austria, where the amount of operators fell from four to three.

According to the Vienna Chamber of Labour, the cost for average phone and SMS users rose around 29 percent between September 2013 and December 2014, with the cost for mobile data users increasing 78 percent in the same period.

Fok makes an attempt to challenge conventional wisdom on that deal, which has become a poster boy for the prevailing attitude in Brussels, where the merger will be approved or blocked.

"For those who care to take an objective look, what we’ve done since combining Three with Orange in Austria in 2013 provides empirical proof [that quality of service will improve]."

It is unclear whether Hutchinson’s pledges will be enough.The Commission is provisionally set to release its Statement of Objections to the deal on 22 April 2016. This is a set of conditions that must be met if the deal is allowed to go ahead.

Margrethe Vestager, the European Commission’s Competition Commissioner since 2014, has already exercised a tough hand over a proposed merger of TeliaSonera and Telenor in her home country of Denmark.

She had imposed such onerous conditions on the deal in order to approve it that the two countries chose not to complete it.
Kester Mann, Principal Analyst at CCS Insight, said that the promises probably wouldn’t be enough.

"The onus will fall on CK Hutchison to propose satisfactory remedies to allay the Commission’s concerns. Today’s announcement is the first step, but it is unlikely to appease competition chief Margrethe Vestager, who has adopted a hard-line on in-market mergers.

"More likely, CK Hutchison will need to facilitate the entrance of a new player to retain the status quo of four national network providers. As such, its pledge around selling slices of network capacity will be the most heavily scrutinised."

However, Mann said that Hutchinson will be keen to make a deal but would have to be careful.

"It will likely be prepared to go to significant lengths to make the deal happen as backtracking would leave Three in a vulnerable position as a sub-scale mobile operator in a market rapidly transitioning to multiplay.

"In agreeing to any concessions, CK Hutchison will need to carefully assess the extent to which their impact would erase the benefits of the deal. Encouraging the launch of disruptive French operator Free Mobile could mean that the advantages of the merger do not outweigh the risk."

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