O2 may be new weapon for Liberty in Germany

Telefonica O2 in talks with potential partners, including Liberty, in bid to get approval of E-Plus takeover

By Caroline Gabriel

The conditions attached to the European Commission's approval of Hutchison Whampoa's acquisition of O2 Ireland sends important signals for bigger deals elsewhere in the region. While allowing the number of operators to be reduced from four to three in Ireland, after the merger of Hutchison's 3 unit with Telefonica's O2, it does this on condition that there is more network access for MVNOs, thus keeping competition lively.

A similar approach may finally resolve the long-running review process for Telefonica's bid to merge its O2 Germany subsidiary with KPN's E-Plus. The Spanish firm wants to buy E-Plus to give it the necessary bulk to compete with T-Mobile and Vodafone Germany, but this would reduce the number of players in a major market, which has often been a significant roadblock for competition authorities.

In April, Telefonica offered those regulators the carrot of an offer to furnish a new mobile player with spectrum. The outcome would reportedly be a new provider to replace E-Plus in fourth place, though O2's original proposal was merely to provide this new entrant with a relatively small amount of 2.6GHz spectrum (less valuable than the 800MHz frequencies, which E-Plus failed to win at auction, one reason for its need to find a merger partner).

However, the suggested approach would still lumber the new entrant with the cost of building the networks, and it would face the same problems of limited scale that have hit E-Plus. This means Telefonica has shifted its attention to the possibility of increased MVNO access, more in line with the Irish deal. According to Bloomberg sources, the firm is negotiating with possible candidates for either network ownership, or expanded MVNO activities. These include the three largest existing MVNOs in a market which already boasts a wide range of virtual providers - Freenet, Drillisch and United Internet.

Perhaps most interestingly, Telefonica is also said to be talking to KabelBW, a unit of Liberty Global. Liberty, the pan-European cable provider, is engaged in a battle with Vodafone to amass fixed, mobile and WiFi assets to create quad play bundles and offset saturating growth in Europe. Liberty's UPC may also be in line for an MVNO or network deal in Ireland after Hutchison 3 buys O2 Ireland.

Under Telefonica's plan, partners would have the option of securing higher capacity and better pricing than traditional MVNO deals offer, using so-called mobile bitstream access, and that would give them the scale to make it worthwhile to invest in infrastructure including backhaul.

But Ralph Dommermuth, United Internet's CEO, said in a recent interview that he would not rule out becoming a network operator, but that it would not be feasible for a smaller provider to roll out national coverage, which would require about 20,000 cell sites. His company, whose wireless service goes under the 1&1 brand, is said to be demanding that O2 pledges sufficient availability of fast network capacity to 1&1 customers after its takeover of E-Plus. United Internet has a roaming agreement with E-Plus which includes LTE.

In Ireland, the conditions for approval mean that Hutchison 3 will facilitate the entry of two new MVNOs, with one of them having the option to transform into a full network operator by subsequently purchasing spectrum from the merged entity. H3G has committed to selling up to 30% of the merged company's network capacity to two MVNOs in Ireland at fixed payments. The capacity is measured in terms of bandwidth and the MVNO entrants will obtain a dedicated pipe for voice and data traffic.

However, Vodafone says it is considering a legal challenge to the deal and has called on national regulator ComReg to take action to ensure a level playing field despite the EC green light. It said it may mount lawsuits in Ireland and Europe, and said ComReg must "ensure that all operators receive an efficient allocation of spectrum that will sustain dynamic competition in Ireland".

It also accused the EC of "favoring operators who do not invest in infrastructure over those that do", though 3 Ireland responded, saying it plans to invest about €300m ($408m) in constructing an LTE network in Ireland in the next three years, in a move that would take its total investment in the country to €2bn.

CEO Robert Finnegan said the combined company "will have the scale and financial strength necessary to compete more aggressively against the number one in the market" - the motivation which is driving the current wave of consolidation in the European market. The value of active or completed intra-European telecoms deals has jumped to $40.4bn in the past 12 months from $1.6bn the year-earlier period, according to Bloomberg.

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