German alarm over key EU telecoms tie-up

Germany's antitrust watchdog has raised the alarm over Europe's biggest telecoms takeover in a decade, as Brussels edges towards giving regulatory approval for the deal.

The intervention by the German competition authority in the €8.8bn merger between Telefonica and KPN's E-Plus will bring further scrutiny to a decision that has already become highly political.

After initially facing stiff resistance from the European Commission over concerns that the tie-up would hurt competition and raise prices, people familiar with the situation said that Telefonica was increasingly confident that the deal would be cleared - albeit with conditions attached to bring new competition to the market.

However, Germany's Bundeskartellamt - the national competition authority - has raised serious doubts over Telefonica's proposed remedies, according to two people familiar with the case. Brussels declined to comment.

One person familiar with the Bundeskartellamt's position said that it was concerned that Telefonica's pledge to give rival operators access to infrastructure would not compensate for the reduction in Germany's network operators, from four to three. German consumers already pay some of Europe's highest rates for mobile services.

The case also poses a serious test of Brussels' merger control regime, which has come under fire from both politicians and an industry that fears that competition rules are hampering investment in Europe's digital infrastructure.

Among those siding with the industry's calls for practical antitrust enforcement are Angela Merkel, the German chancellor, and Jean-Claude Juncker, the Berlin-backed favourite to become the next European Commission president.

Shareholders had become more positive that approval would be granted after Telefonica proposed a broad package of remedies designed to maintain competition between German operators - such as allowing rivals to use part of the network of the merged group. Shares in Dutch group KPN climbed back to near a four-month high at the end of last week.

But the Bundeskartellamt wrote a letter to the commission last month, outlining continuing concerns, according to a person close to the situation.

Another person familiar with the German watchdog's position said that there were worries that the proposal to allow a new entrant to use Telefonica's network on a wholesale basis would not work. Other doubts centred on the necessity for a merger, given that E-Plus does not appear to be a failing business.

Europe's competition authority is still considering the German merger, with a decision expected early next month at the latest.

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Brussels faced similar complaints from Austria's competition authority when clearing a 4-to-3 telecoms merger last year, in which the conditions included providing access to a virtual operator. Since then, prices in Austria have increased.

More recently, Brussels has faced criticism from Ireland's telecoms regulator after approving another 4-to-3 deal, on the condition that the groups involved agreed to lease network capacity to rivals.

Telefonica is seeking to provide sufficient concessions to assuage competition concerns without giving away so much that it negates the benefits of taking over a competitor in the market.

Moody's, the rating agency, warned this week that the telecoms industry would gain limited benefits from sector consolidation if merger conditions imposed meant stronger rivals.

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