Derailed O2 merger will stymie UK telecoms M&A – Moody’s

Added 17th May 2016

The blocked merger between Telefonica’s O2 and CK Hutchison Holdings’ 3 UK “has consequences for the rest of players in the UK market, as well as for the broader European telecoms market,” said Moody’s Investors Service.

Derailed O2 merger will stymie UK telecoms M&A – Moody’s

One such side effect is the slowed mobile market consolidation “due to the fear of increased regulatory limitations,” the credit rating company said in a report released last Friday.

The proposed merger between Telefonica and CKHH is the second major telecoms deal the European Commission (EC) has blocked since the new commission took up the mantle toward the end of 2014.

The EC’s demonstrably “tougher stance” on mobile consolidation deals “is a credit negative for operators in four-player markets that are waiting to see consolidation such as Spain, France, Poland, the Netherlands or Sweden,” Moody’s stated.

Equally problematic is the fact that European telecoms do not have a template of remedies the EC would find acceptable. “With no template in place, companies will continue to have to test the limits of what the EC can accept to approve a mobile merger,” warned Moody’s.

On the flip side, Moody’s anticipates the failed deal will force other telecom giants, such as Virgin Media, Sky and Talk Talk, to reconsider their M&A options.

“A merger with any of these players will not have the same level of regulatory restrictions as a mobile merger, as it would not remove one of the mobile players in the market,” the firm explained, citing BT’s successful acquisition of EE as a recent example.

Unsurprisingly, BT and Vodafone were the clear beneficiaries following the EC’s decision to disallow the Telefonica and CKHH merger. “The deal would have created a large player that could challenge BT’s leading position in mobile, while Vodafone would have become the smallest player in the market,” said Moody’s.

Moody’s also mentioned that it was not out of the question for UK-mobile centric operators to enjoy other benefits from the unsuccessful merger, including an increase in market prices.

“Price increases could lead to market repair, even if there is no consolidation. This scenario could also be positive for 3 UK when compared to their positioning before the deal was announced in March 2015.”

Though, CKHH could benefit from the above hypothetical scenario, things will be tougher for Telefonica. The Spanish telecoms company will need a Plan B that will help reduce its debt and improve its operational cash flows, Moody’s stressed.

Last Friday, Moody’s announced it had adopted a negative outlook on Telefonica in the wake of the EC’s decision. CKHH managed to maintain its credit rating.

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