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6 December 2018

Vodafone likely to get clean bill of health from an EU “investigation”

Earlier this week Reuters ran a piece suggesting that Vodafone’s proposed $21.8 billion takeover of Liberty Global’s German and Eastern European assets will face a full EU antitrust investigation. The story came from a leak, so we can’t confirm or deny it. The piece said simply that the deal was likely to be referred for a longer, in-depth investigation.

But there is a lot you can read into this, and hurried and harried phone calls will be carrying on in darkened corridors of German power, and indignant voices will be raised. We all know that this is a statutory step in approving a deal at the European level that would be refused at the German level. We suspect this deal is likely to be approved with minimum assurances and remedies from Vodafone.

When a deal of this type was first mooted a few years back we said plainly and clearly that it was unlikely to get approval. But after the European Commission approved the Liberty Global deal to acquire Ziggo, and then another deal to merge that with Vodafone, there is suddenly nothing certain in European anti-trust behavior.

Vodafone Ziggo was left with 65% of pay TV and 51% of broadband in the Netherlands, and was second placed in cellular – all through two mergers. The European Commission is not supposed to allow mergers to create new monopolies in Europe, under anti-trust legislation. It can prevent any merger based upon it being against the public interest. And it used to.

Since 2000 companies have been trying to merge the 4 major German cable operators back together to create a viable rival to Deutsche Telekom. And each time such a deal has been pushed back by the Bundeskartellamt or Cartel Office. It even blocked a deal for one of them to merge with the East German cable firm Tele Columbus in 2013.

After one such attempt to put KDG with a Unity Media which had already bought the two other smaller Germany cable firms, Ish and Iesy, Liberty Global moved to buy both Kabel Baden-Wurttemberg and the enlarged Unity Media, using the proceeds from its sale of JCOM in Japan, finally leaving Kabel Deutschland isolated at Vodafone.

Given that to our memory the Bundeskartellamt has turned down the merging of Unitymedia, Ish Iesy, and KDG on at least 3 separate occasions, the only hope of anyone getting this merger through is if the Bundeskartellamt does not carry out the investigation. It’s not as if these four companies broadband concentration has gone down – many of these cable firms had initially very low levels of DOCSIS numbers and are only now picking up momentum in broadband. In other words, if the Bundeskartellamt turned it down then, there is ever more reason to turn it down today. It is perhaps marginally less dominant in pay TV than it was, but some 14 million households (out of 37 million) rely on TV from these companies and some 13 million for broadband, and that is in a territory notoriously under-penetrated in pay TV and broadband.

The European Commission can only keep the Bundeskartellamt at bay if it carries out a full investigation into the merger and then pronounces it a reasonable deal to go ahead, and then only if it is based on some economic tests which shows that the company created will not have significant market power – in other words cannot shift prices without losing market share.

But the Vodafone Ziggo deal set precedents in terms of market share for the rest of Europe. Given that Deutsche Telekom has 13.5 million broadband customers, but that most of these are below 50 Mbps, and all of the cable lines are up around 300 Mbps and above – the merged entity can be said to have a dominant market share. Even without that, almost 50% market share should still be seen as dominant.

There MAY be pressure for Vodafone to offer concessions, but really it only has to point at the Netherlands as a precedent and say it sees no problem. The EU is then almost forced to agree, given its behavior in the Netherlands.

Our understanding is that Vodafone has been in a long dialog with the European Commission and if any objections to the deal were terminal, it would never have taken the deal this far.

If the European Commission goes ahead and grants such a merger, with or without remedies, it will bring down the wrath of the Bundeskartellamt, and every other German telecommunications and financial agency, and all the German regions, so much so that there may be a constitutional crisis, and at least one legal action – it seems fine to those authorities desecrate in markets which are not German, but heretic to do the same in Germany.

On a Europe wide basis the resultant company would become Europe’s biggest provider of broadband, cable, not to mention Vodafone’s existing mobile dominance. The right course of action would be to approve the deal outside Germany involving Liberty Global assets in the Czech Republic, Hungary and Romania, and refuse it in Germany, but our sense is that if this were going to happen, the European Commission would have acceded to an earlier request from the Bundeskartellamt, and let it carry out the analysis in Germany.

This idea of talking to the European Commission first, behind closed doors and getting their opinion first on what would work, and what wouldn’t seems, on the surface, reasonable, but other will see it as reeking of corruption.