UK Regulator Fights Brussels On £10bn O2 Deal

British competition watchdogs are fighting a rearguard action against Brussels in a bid to scrutinise a Hong Kong tycoon's £10.25bn takeover of O2, the UK's second-biggest mobile phone network.

Sky News has learnt that officials from the Competition and Markets Authority (CMA) are lobbying the Government and European counterparts to argue that the takeover of O2 should be overseen by domestic regulators.

The CMA has been engaged in discussions on the issue for several weeks following Hutchison Whampoa's announcement in January that it is in exclusive talks to buy O2 for £9.25bn, with a further £1bn payable dependent on the company's performance.

That deal would see O2 combined with Three, the smallest of the major UK mobile networks, catapulting it into the status of the country's biggest operator.

Under European law, major cross-border deals are scrutinised by Brussels unless at least two-thirds of each party's business is conducted in the relevant EU member state.

National regulators are permitted to apply for an exemption to this trend, although City sources said it was unlikely that the CMA would secure one in this case.

O2 is owned by Telefonica, the Spanish telecoms group, while 3 UK is owned by Hong Kong-based Hutchison (HKSE: 0013-OL.HK - news) .

The CMA is said to be arguing that the O2 takeover would be best-assessed by UK regulators, partly because EE, which is currently the biggest player in the UK market, is in the process of being acquired by BT for more than £12bn.

Together, the two deals would mean that four major operators would be reduced to a triumvirate, a concentration which typically gives rise to competition concerns in consumer-facing markets.

BT's chief executive, Gavin Patterson, has said publicly that he expects the deal involving his company to be supervised by UK watchdogs, with the CMA expected to begin that process shortly.

The tussle involving the CMA underlines the extent to which national regulators are reluctant to cede sovereignty over largely domestic mergers to Brussels.

An insider pointed out on Thursday that the Hutchison-O2 deal had yet to be formally notified to competition authorities and said the investigative process had not commenced.

Other EU markets such as Austria, Germany and Ireland (Other OTC: IRLD - news) have seen mergers in the telecoms sector leading to a reduction in the number of major network providers.

Because those deals also involved overseas acquirers, they were passed to Brussels, which in each case approved them subject to commitments from the purchaser relating to the provision of spectrum to mobile virtual network operators, which piggyback on the main networks.

Sky plc (Other OTC: BSYBF - news) , the owner of Sky News, recently announced such a deal with O2's parent to offer mobile voice and data services to its customer base.

In Austria, where Hutchison was the acquirer, Brussels was criticised for failing to enforce the delivery of those undertakings, with some mobile tariffs rising sharply in price across the sector.

In January, the European Commission said it would decide whether the acquisition by Orange (Taiwan OTC: 4554.TWO - news) of Jazztel (Other OTC: JAZTF - news) should go ahead despite a request from the Spanish competition authority.

The EC said that "given its extensive experience in assessing cases in this sector, it is better placed to deal with the transaction and ensure consistency in the application of merger control rules in the fixed and mobile telecommunications sectors across the EEA".

Sky News revealed recently that Hutchison is in discussions with a number of sovereign wealth funds and pension funds about committing nearly £3bn to help fund its takeover of O2.

The CMA declined to comment.