By Frances Robinson and Vanessa Mock
BRUSSELS--A questionnaire being sent to telecoms companies by
the European Union's competition authorities suggests they are
examining network-sharing agreements, the allocation of radio bands
for the rollout of mobile 4G and entry barriers to the German
market as they consider the proposed merger between Telefónica
Deutschland AG and the German unit of Royal KPN Mobile NV.
The questions indicate that the European Commission is
considering whether to make the parties dispose of key radio
spectrum to gain regulatory approval for their EUR8.55 billion
merger ($11.69 billion).
The high-profile deal, announced last July, would create
Germany's largest wireless carrier by customers, creating an entity
of a similar size to the local units of Deutsche Telekom AG and
Vodafone Group PLC.
The confidential questionnaire, which has been seen by The Wall
Street Journal, finds the commission asking about competition and
pricing in both the retail and wholesale mobile market in
Germany.
It also seeks to find out how the deal would affect frequency
allocation in Germany, and whether it would be possible to roll out
a 4G network on either the 800 MHz or 1800 MHz radio band. Radio
waves of different frequencies are used for everything from
television signals to ambulance radios, with bands used for mobile
broadband the most valuable asset for a wireless operator.
The questionnaire reflects earlier commission worries about the
merger's impact on the German wireless market, and doesn't focus on
any single, specific area of concern.
The merger is being closely watched as it would see the number
of operators fall from four to three in Germany, whose wireless
market is worth around EUR22 billion.
It would see Telefónica and E-Plus, KPN's German unit, command a
large slice of the spectrum, allowing them to boost the volume of
calls and data traffic.
The review is seen as a key litmus test for further
consolidation in Europe's fragmented telecoms sector. After years
of economic strain thanks to Europe's deep recession, telecoms
operators are looking to consolidate to achieve economies of scale.
Leading operators have called on the commission to relax the EU's
merger control rules, amid concerns that the regulatory process
impedes major deal making.
The EU's antitrust watchdog routinely sends out questionnaires
to rivals and third-parties as part of its in-depth review of a
merger. Respondents are expected to reply to the seven-page form by
the end of this week, one person familiar with the situation
said.
The EU's antitrust chief, Joaquín Almunia, said last year he was
concerned the transaction would "remove an important competitive
force" and would change the merged entity's incentive to exert
significant competitive pressure.
"Anyone watching this deal would expect the two operators to
have to give up some spectrum, as a way of addressing concerns
about competition and pricing. Regulators are also likely duty
bound to make enquiries as to whether the same benefits could be
achieved through network sharing, rather than a full merger," said
Sam McHugh, senior research associate at Sanford C. Bernstein, an
investment research firm in London.
Mr. McHugh points to Hutchison Whampoa Ltd.'s EUR1.3 billion
purchase of wireless carrier Orange Austria, which was cleared by
the commission in December 2012 after the Hong-Kong based firm
agreed to divest radio spectrum and offer network access to new
rivals. Similar to Germany, the number of operators in Austria also
fell from four to three on the back of the deal.
Freenet AG's Mobilcom-Debitel and Drillisch AG already use the
E-Plus and Telefónica networks, but the commission said last year
it wanted to ensure that other so-called mobile virtual network
operators also continued to have access to bandwidth.
"Prospective and existing MVNOs and service providers would have
less choice of host networks and hence weaker negotiating power to
obtain favorable wholesale access terms," it said last year.
The commission launched an in-depth probe into the deal on Dec.
20, and has until May 14 to make a decision. Germany's competition
watchdog had sought to review the deal itself, arguing it affected
only the national market, a demand rejected by the commission.
The opening of an in-depth inquiry doesn't prejudge the outcome
of an investigation.
Write to Frances Robinson at frances.robinson@wsj.com and
Vanessa Mock at vanessa.mock@wsj.com
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