Holes in the deal
Virna Rizzo and Jordan Le Gallo, lawyers at Cohen Amir-Aslani, a member of Globalaw, explain the impact of Brexit on the UK's Competition and Markets Authority.
On January 1, 2020, the divorce between the EU and the UK was finalised.
Now that the UK is no longer an EU Member State, it gains new freedom to pursue its own enforcement and policy agenda. Among the areas impacted by Brexit is that of telecommunications.
For many, the strength of telecom operators presupposes great international diversification. For example, Virgin conducts only about 15% of its business in the UK. The UK's presence in the EU allowed them to benefit from EU telecoms rules and the single market facilitating their export. British operators know now that they have to grow fast and have a presence beyond the UK in order to be competitive on the global market. BT, the telecommunication leader in the UK, demonstrated this need with its purchase of EE in 2016.
While the Trade and Cooperation Agreement (the “Agreement”) runs over 1,200 pages, uncertainty remains in a number of key areas, such as competition law, and a number of its provisions simply mirror the position agreed under other recent EU trade agreements.
The Agreement only states that the “Parties [only] recognise the importance of cooperation between their respective competition authorities with regard to developments in competition policy and enforcement activities”. Moreover, the competition authorities “shall endeavour to cooperate and coordinate, with respect to their enforcement activities concerning the same or related conduct or transactions, where doing so is possible and appropriate.”
The Agreement thus makes some provisions for a level playing field through the “open and fair competition” language and strongly recommends the Competition and Markets Authority (the “CMA”), the independent public authority responsible for examining mergers, to cooperate with the European Commission (the “EC”). However, we believe that the end of the Brexit transition period will bring with it significant changes to the application of antitrust and merger control rules in the UK.
Uniform pre-Brexit rules
Before Brexit, and thanks to the “One stop shop”, the European Commission was the only available authority responsible for the evaluation of mergers which met the EC’s thresholds of the EU Merger Regulation (the “EUMR”). In other words, national competition regulators were not permitted to review a merger having an “EU dimension” (although the CMA was able to review the transaction on limited public interest grounds and a transaction could be ‘referred down’ to the CMA in certain circumstances).
A post-Brexit conflict of authority
Now that the transition period has ended, the one-stop-shop principle has fallen away – the European Commission is no longer authorized to rule on potential mergers within the territory of the UK. The CMA is now the only referral authority in the UK. This opens the possibility for merger deals meeting both the UK and EUMR merger control thresholds to seek merger control clearance from both the UK and the EU regulators. However, it also introduces the prospect of acquisitions being cleared by one regulator but blocked by another.
Indeed, businesses which are carrying out a merger or acquisition will have to proceed before the CMA and the European Commission with two different procedures, two different regulations and two potential risks of sanctions. Even if the UK maintains some of the old competition rules from the pre-Brexit area (but we believe they may diverge further in the future), the CMA is no longer required to follow the interpretation of competition law by the EUCJ nor to ask for questions regarding said interpretation.
Tech businesses and merging parties shall therefore anticipate potential further costs, regulatory burden and uncertainty that may result from the need to comply with the two separate EU and UK competition law regimes. In practice, tech businesses with activities in both in the UK and EU: (i) will need to ensure that their agreements and practices continue to be EU and UK competition law compliant; (ii) should be mindful of the potential risk of parallel cartel investigations and their leniency strategy in light of such potential dual investigations; and (iii) should consider the impact of dual UK and EU merger filings on deal planning and strategy.
Also, although UK merger filings are theoretically voluntary, the CMA has intrusive powers aimed at reversing the effects of completed mergers which took place prior to UK clearance, if the CMA later considers that such mergers have anti-competitive effects on the market. In order to avoid the risk of a forced divestment and the heavy costs associated with that, most buyers will notify the CMA if there is any risk for the merger to give rise to serious competition concerns. We can therefore reasonably expect Brexit to have a considerable adverse effect on the CMA, which is likely to need substantial additional resources in order to deal with its increased case load.
From the CMA’s perspective, it is geared up for the extra workload that Brexit will bring now that the European Commission no longer has jurisdiction in the UK. The CMA has already announced that it will review an extra 50 merger deals each year, which consists of an exponential increase if we consider that it “only” reviewed 62 deals in 2019. In order to be fit for future purpose, the CMA has been on a recruitment drive and we can predict that it will double in size by 2022.
Following the UK’s departure from the EU, we also see the CMA having a freer hand to apply UK competition law to those cases with a national connection which are of particular interest to the CMA and which will probably drive the CMA to take a stance in favour of British market players now that the UK regulators are liberated from the responsibility of enforcing EU competition law.
According to Yves Gassot, CEO of IDATE, a think tank that specialises in telecommunications, “The UK has always been in favour of liberalising the telecoms sector, he observes. They've never put the brakes on it. So, there is no reason to think a gulf will emerge between the EU's competition rules and those put in place across the Channel... .” However, the CMA could be willing to promote mergers which will be led by British telecommunication operators in order to “help” them navigate the global market all the more, in large part as the stakes are high and the period is proliferating in terms of rapprochement between telecommunications operators.
To date, the existence of Chinese and American telecom giants has long been the driver of European telecom operators growing faster to keep up on the global market. Also, the fall of the pound sterling may encourage some foreign telecommunication operators to market in the UK. BT has for example been the target of foreign operators in the UK for quite some time. On August 2020, Deutsche Telekom already expressed its intention to acquire BT. The UK thus represents an attractive target for global telecom operators. The CMA is expected to take on a more active role in global cases impacting competition and consumer protection from 2021, acting as a competition watchdog, in the interests of protecting British telecom operators to the detriment of European operators.
Parties should also bear in mind that the CMA is adopting an increasingly restrictive stance. In the past two years in particular the CMA has blocked seven transactions and significantly increased the proportion of transactions sent for an in-depth review. In accordance with this trend, UK competition rules will likely diverge from EU competition law in the near future. With this dynamic approach, parallel UK and European Commission merger reviews for a strategic deal raising material competition concerns is unlikely to be straightforward.
The Virgin/O2 deal
As an act of good faith on behalf of the European Commission, on November 19th, 2020, the European Commission transferred the examination of a proposed £31bn merger (the “JV”) between Telefonica S.A. (“Virgin”) and Liberty Global Plc (“O2”) to the CMA, in large part due to the main impact of this being within the territory of the UK. Nevertheless, we cannot totally exclude that such decision was taken in the context of tense negotiations at the conclusion of a post-Brexit agreement.
Since December 11th, 2020, said anticipated JV was placed under Phase 2 review of the CMA, leading the CMA to decide whether or not the merger is more likely than not to lead to a Substantial Lessening of Competition (“SLC”).
Both companies are banking on the CMA treating the merger of the cable broadband and mobile companies similarly to BT’s £12.5bn takeover of mobile group EE in 2016, which was cleared without the watchdog requiring any remedies. However, due to the extent the O2-Virgin agreement is expected to reshape UK telecoms by uniting the country’s second-largest broadband network with the largest mobile operator, we expect the CMA to take a different path this time.
“The CMA believes that, given the limited alternative providers available, fixed -MVNOs would likely experience lower quality of service or higher prices for wholesale mobile services if the JV restricted its supply of wholesale mobile services”. Indeed, Virgin-O2 merger may create the first telecom operator in the UK just before BT, with 34 % against 32 % of the market share. Although it is impossible to predict whether or not the CMA will approve said JV, we expect the CMA to reject the deal on the grounds that, following the merger, Virgin and O2 may have an incentive to raise prices or reduce the quality of these wholesale services, ultimately leading to a worse deal for UK consumers.
There are too many uncertainties to give a clear answer on CMA's objectives in its new missions, starting with the Virgin / O2 JV. However, with regard to the competitiveness of the telecom actors, we believe that the CMA, in addition to its role as regulator of British competition, will promote British players in future operations, which could lead to distortions of decisions with the European Commission. This situation would be disastrous for the interests of the European competition (in the broad sense) against American and Chinese competitors. The cooperation between the CMA and the EUCR is therefore fundamental. Indeed, they should never forget that while the divorce is finalised, both parents shall always think about the interests of their children.