EU clears Telefónica’s
O2 purchase

10 Jan 2006

The European Commission has given its assent to Telefónica’s €27bn acquisition of mobile operator O2, provided certain conditions are met.

Commissioner Charlie McCreevy approved the deal but added the proviso that Telefónica promises to leave the FreeMove Alliance low-cost roaming alliance, where it co-operates with France Telecom, Telecom Italia and Deutsche Telecom.

In a statement, the commission said it was concerned that the acquisition would result in distortions of competition in the market for international roaming services, in particular in the UK. “In order to remove the commission’s concerns, Telefónica has undertaken to leave the FreeMove alliance. In light of this commitment, the commission has concluded that the transaction will not significantly impede effective competition in the European Economic Area or any part of it.”

As a result of its acquisition of O2, Telefónica will be able to enter the busy UK mobile market and re-enter the German market which it abandoned in 2002. Telefónica will gain 25 million customers in those countries as well around one million subscribers in Ireland.

The commission had concerns that another roaming alliance known as Starmap faced considerable danger unless Telefónica left the FreeMove alliance, which would become a dominant force in the international roaming market. “The commission’s market investigation showed that following the proposed transaction, O2 would in the normal course of events be expected to move from the Starmap alliance to the FreeMove alliance, or align its behaviour with that of the latter, as a consequence of its dependency on Telefónica. As a result, O2 would in all probability be less ready to exchange international roaming traffic with non-FreeMove members. This would imply significant cost increases for those companies, in particular in the UK where no international roaming provider independent of FreeMove would remain after the transaction (except for the fully integrated Vodafone Group).

“To address the commission’s concerns and in order to avoid an in-depth investigation, Telefónica committed itself to leave the FreeMove alliance as soon as possible and not to re-enter that alliance without the commission’s prior consent in the coming years. With the termination of its alliance membership the serious doubts outlined above are removed and the commission can approve the merger,” the commission said in a statement.

By John Kennedy