When is telecoms M&A in the public interest?
BT’s TalkTalk acquisition raises the question, what’s in the public interest.
The proposed acquisition of TalkTalk by BT is fast becoming one of those stories where what seems to be the obvious answer to bailing out an ailing brand may not be a perfect or complete one.
If you’ve been reading all the analysis in the last 24 hours, then you might also have concluded that BT’s decision to step in to rescue TalkTalk from administration with a £400m deal is understandable. TalkTalk has been struggling for some time, and the business has reportedly been unable to find an alternative buyer despite an extended sales process.
Its long-term difficulties are well documented: declining retail customer numbers, cashflow problems, and a substantial debt burden. The business also operates in an intensely competitive broadband market, with ridiculous pressure on margins that are hard to remedy.
So, BT stepping in and saving the day (and cash on the purchase value), is a sensible strategy for a brand that wants to grow its customer numbers and affirm its place in one of the world’s most complex and competitive telecoms markets.
The intervention protects services for around 2.5 million customers and around 900 jobs, with continuity for customers who rely on broadband and voice services every day, including vulnerable customers and organisations providing essential public services.
When a rescue risks restructure
That really matters, as Culture Secretary, Lisa Nandy MP, made clear when she issued a Public Interest Intervention Notice to speed up the regulatory process for the BT deal, citing risks to public services and vulnerable customers if the TalkTalk’s services were disrupted.
But alarm bells ring. Could this intervention inadvertently increase market power? Let’s not forget that the week before this story broke, the CMA provisionally said that the £2bn acquisition of Substantial Group by nexfibre might diminish competition in the wholesale fixed broadband market (the inquiry continues).
So, with that context, and given the scenario the BT / TalkTalk deal presents, at what point does giving the go ahead on the grounds of protecting the connectivity of millions of customers give way to a permanent restructuring of the market?
Here lies the dilemma and the debate.
Could TalkTalk’s failure actually be the right outcome for healthy market competition here? Hard as it is to comprehend, should any company bail it out?
Lutz Schüler, CEO of Virgin Media O2, has made precisely this distinction in his open letter to Lisa Nandy MP. He argues that there is a difference between ensuring short-term continuity for vulnerable customers and allowing a permanent ownership solution that effectively hands the business to a dominant incumbent without a proper competitive process.
It could be argued that setting a deadline of October 19th to the CMA to decide the market fate, undermines the regulatory due diligence process the UK is known and celebrated for. Not only that, it doesn’t address the market dynamics of ‘distress’ that have led to TalkTalk’s plight.
To summarise the views expressed, Lutz has called for credible alternatives to be explored and for the longer-term implications for competition to be properly assessed.
And here lies the crux of the debate we see unfold before us. It raises a legitimate question about consistency in UK telecoms regulation. But will these alarm bells be dismissed as cynical because they come from a competitor?
Is a staged approach the only approach?
If you look at the Vodafone–Three merger, a commercially driven transaction, the CMA conducted a detailed investigation to decide whether it could go ahead over the course of 14 months (not 14 days).
When the CMA granted the merger, there were stipulated remedies, including a £11bn network investment programme, protections for certain retail tariffs and wholesale access commitments for MVNOs.
These aren’t small things. They are significant and protect market dynamics, competition and consumers.
Though the TalkTalk situation is different by nature of it being a rescue of a business in administration, rather than a conventional strategic acquisition, there’s a strong argument that governance should still apply i.e. the implications for competition cannot be neglected simply to keep the router lights on, and nor can it be an afterthought, otherwise you set a precedent that there’s a backdoor to CMA approval.
Where does that leave us then?
I asked at the beginning, is letting TalkTalk fail altogether the right thing to do?
I’m not sure it is. Perhaps the real debate is more about who should save it, under what conditions, and with what safeguards for the markets.
That’s why I think there may be a way that protects both customers and the competitive structure of the market. The process could potentially happen in stages.
Pritoritise, stabilise, future proof
The immediate priority has to be the customers and employees currently caught in the middle. They should not become collateral damage in a debate about market structure. So, stage one would be to allow BT to stabilise the business and protect customers, while allowing the CMA sufficient time to assess the permanent ownership question.
Then, if deemed appropriate to allow BT to complete the deal, the CMA can assert the appropriate structural or commercial remedies needed to protect consumer interests – the very core of its remit – before a permanent transfer of assets to BT.
And if it’s declared uncompetitive, then we all know where we stand, and the credible alternatives Lutz calls for can be found.
Not only that, with such an approach you protect the vulnerable and critical today without weakening competition in the future.
And that matters. That really matters.
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