TCS Daily

Telecom Template

By Jeremy Slater - June 12, 2002 12:00 AM

BRUSSELS -- A proposed merger between two former national telecommunications monopolies - Sweden's Telia and Finland's Sonera -- is set to become a template for EU competition policy as the European Commission uses the leverage it has in vetting the deal to promote liberalization of the market.

European competition authorities, in the past, have attempted to open up other utility sectors, such as gas and electricity, by imposing demands on businesses. But this case marks the first time that a successful deal in the telecoms market has been exposed to such pressures.

The outcome of the investigation will have major implications for other European telcos as the decisions taken to clear the merger will form an analytical basis used by the Commission's competition experts for future deals, such as the expected one between Dutch operator KPN and its Belgian counterpart Belgacom.

The key issue for liberalization is the local loop, or the "last mile" between the local exchange and a user's phone. Prior to privatisation the incumbent companies held a monopoly for this link, thereby keeping local calls expensive and slowing the growth of Internet use in Europe.

In 1999 the unbundling of the local loop was a key issue in the Commission's examination of a proposed deal between Sweden's Telia and Norway's Telenor. EU officials who worked on the case say they made some headway on this subject before the deal was struck down because of the bickering between the telcos' two boards. The acrimony between them was obvious when the Swedes went on record as calling their Norwegian counterparts "a bunch of communists."

"Competition policy has always been seen as a tool to create a single market in the Europe, unlike the analysis of mergers in the US," said Alec Burnside, partner at Brussels-based law firm Linklaters & Alliance. "Remedies that are asked for are there to improve the operation of the internal market, the Commission believes."

The Commission's merger task force will look at local loop unbundling issues in its review of the merger between Telia and Sonera. But industry and regulatory experts say they don't expect the Commission to try to kill the deal unless little progress is made on the subject.

"The Commission has used merger review to push certain regulatory imperatives in the past, notably unbundling, which caused considerable difficulties in the Telia-Telenor merger," said Matthew Heim of public affairs company Gavin Anderson. "This may well recur in the Telia-Sonera case."

The merger was officially notified to the Commission late last month and the first phase investigation has a deadline of July 1 unless an extension is granted.

"The deadline could be extended if the companies ask for it or if they submit undertakings in the first phase that need further analysis," said Amelia Torres, the Commission's spokeswoman for competition policy.

The stakes are high for both the Commission and the companies themselves. The Telia and Sonera merger will in effect be a test case, as the telcos are both former national monopolies, and the Commission wants to use it to encourage reform of the sector. Other parts of the EU executive, including the directorates for the internal market and enterprise, hope that companies' keenness to win clearance for their merger will indirectly force open the Nordic market including access to the local loop.

But the companies are playing hardball. Anders Igel, chief executive of Telia-Sonera, suggested at the end of May that any investigation could drag out beyond the initial phase into a longer, more detailed probe.

He may just have been warning the financial markets that the Commission might find it difficult to fast-track clearance of the merger, because of near monopoly positions the companies have in certain sectors -- ie mobile telecoms services in Finland. Some were surprised also that the comment was expressed in Brussels since, at that time, the deal had not yet been notified to the merger task force.

"Part of life is about managing expectations and maybe though prenotification discussions the companies were expecting that there will be a full in-depth investigation," said one source.

Another possibility is that Telia and Sonera are trying to force the merger task to clear the deal early.

"It is possible that they are trying to put pressure on the Commission, so that they can finish the negotiations in phase one of the investigation," said the source.

Ironically the Telia-Sonera deal has more likelihood of winning clearance than a lot of other cross-border mergers, since the Nordic telecoms market is already more freed up than in other parts of Europe.

"Following negotiations about the unbundling of the local loop in the Telia and Telenor case the Scandinavians have made great strides in their efforts to unbundle against those made by other member states," said Heim.



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