The right time for savvy investment in the telecoms market?

Tom Cowap

Published January 2016

At first glance, the two mega deals taking place in the UK telecoms sector appear to reduce opportunities for mid-market service providers. But is this so? By acquiring EE, BT combines the UK’s largest mobile business with the largest phone and broadband provider, enabling it to offer the fully bundled quadplay service (TV, fixed line, broadband and mobile) available from competitors like Virgin Media. Less choice for consumers? Not an issue according to the Competition and Market Authority (CMA), which has cleared the acquisition without any remedies on the basis that each company is a small player in the other's market.

However, the O2/Three merger under way is likely to face some hurdles. The £10.3bn deal would create the UK’s largest mobile phone group. It’s therefore likely to inspire some kind of remedy; a forced sell off of millions of pounds worth of spectrum (essentially mobile frequency), cheaper pricing for Mobile Virtual Network Operators (MVNOs) or increased MVNO availability. While the existence and increasing role of MVNOs is likely to help – the largest being Virgin piggy backing on EE’s network, Tesco’s joint venture with O2 and now Sky looking to move into the market via a wholesale purchase of O2 spectrum – this deal will still reduce the number of full UK Mobile Network Operators (MNOs) from four to three. So, who wins in the event of remedies being levied and can the remedies outweigh the loss from reduced competition and increased power among the big players?

While fellow large cap bundled (quad and triple play) providers might be hoping for a spectrum sell off (as should customers, evidence in Europe strongly suggests customers get the best pricing via keeping at least four MNOs in play), a forced reduction in MVNO pricing would be the most beneficial outcome to mid-market companies and the one O2/Three are most likely to push for – making this a potentially ripe time for private equity investment. Targets need to have the right niche though, with the market moving towards consumers taking a bundled offer and receiving all their services from one provider, consumer-focused mid-market companies which don’t have the capital to field a TV product are likely to struggle to compete. However, B2B businesses could thrive in cheaper MVNO pricing with a customer base that has no requirement for a TV product and where their fixed line and mobile offering is protected by regulation. Let’s see what comes out in the statement of objections.

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Tom Cowap
T: +44 (0) 20 7246 0512
E: tomcowap@catalystcf.co.uk