Hanging on

Hutch's bid for O2 is down but not yet out

CK Hutchison's 9.25 billion pound ($13.2 billion) bid for Telefonica's O2 UK mobile operator is battling serious static. Britain's competition authority strongly opposed the deal in an April 11 letter to European trustbuster-in-chief Margrethe Vestager. Ultimately, though, Brussels will make the final call - and national competition authorities' objections failed to stop recent consolidation in Ireland, Germany and Austria.

Hutchison and Telefonica's foremost challenge is to show how a fourth UK mobile operator of stature could be fashioned from the bits they are forced to spin off. The question for the trustbusters is how much spectrum the merger partners would grant it and whether it might be able to buy any more than the 20 per cent of Hutchison's British mobile unit that the Asian company says is on offer.

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Other headaches raised by the UK's Competition and Markets Authority include the pair's tangled joint ventures. Hutchison's UK operator, Three, has a 50:50 partnership with EE, whose takeover by BT was approved in January to create the largest national player. O2, meanwhile, has joint ventures with second-largest operator Vodafone, as well as with supermarket chain Tesco for its Tesco Mobile offering. The deal with Vodafone includes sharing of infrastructure, which would make it expensive to exit.

Vestager will look to the effect on the UK consumer. Moving from four dominant mobile operators to three, as would happen in the UK after a Three/O2 tie-up, may not always hurt the consumer. Research, admittedly commissioned by Hutchison, suggests unit prices actually fell in Austria after such consolidation. The same happened in Germany, according to HSBC analysts. Although total bills may sometimes rise, customers could simply be using more data as services improve. And Citi research suggests that Hutchison's acquisition may raise prices in the UK by as little as one per cent, assuming Tesco Mobile becomes fully independent.

Still, Li Ka-shing, the Asian tycoon behind Hutchison, is far from home and dry. Lower unit prices might just be down to the bits hived off by the merging parties, rather than the hike in infrastructure investment that telcos claim. Three and O2 will thus have to argue that the costs of exiting or rejigging joint ventures won't be passed on. But making a really convincing case entails undercutting their deal's attractions.