By Jacques de Greling, Director, Corporate Ratings

Competition is particularly an issue in this case because the merger would create Italy’s largest mobile operator with a combined 35% market share. The merger would involve one of the operators in the Italian market whose entry the European Commission had required to ensure there was sufficient competition after the merger of mobile operators Wind and Hutchinson-Tre in 2018.

First, there is no guarantee that this latest merger attempt would get approval from Brussels. There are no indications that the EC believes the number of operators can be reduced to three from four without compromising competition for mobile services, except in exceptional cases. That risk is bound to weigh heavily with Vodafone particularly if there is no break fee proposed by Iliad.

Secondly, the EC would likely insist on remedies to recreate a similar level of competition in the Italian market for the deal to go through, thereby diminishing the appeal of the merger for Vodafone in the first place particularly if the deal involves the UK company retaining a stake in the combined business.

For the EC and national regulators, Europe’s mobile sector remains robustly profitable and cash-generative despite the recent economic crises – the pandemic, the energy shock – with ample financial headroom to cope with relatively modest capital-spending requirements in mobile telephony. Beyond spectrum sales, the introduction of 5G has not led to any significant increase in mobile network investment, which has remained stable over the recent years, as it was after the introduction of 4G, as simply the newest technology replacing older standards. This is well illustrated by mobile capex (excluding licences) in Finland, the first European country to allocate 5G licences, where spending over the past eight years has steadied at around 13% of mobile services revenue.

So, with the limited number of competitors currently operating in Europe, there is little urgency in the consolidation of national telecoms markets from a regulatory perspective.

If Vodafone and Iliad have any doubts about this, they should just look across to Spain. Here, the EC has insisted that DIGI, currently a mobile virtual network operator (MVNO) be transformed into a fully-fledged network operator to maintain sufficient competition as a condition for the proposed merger between Orange Spain, a unit of France’s Orange SA, ad Spain’s MásMóvil.

On paper, Vodafone possibly has other options in Italy which would face considerably less scrutiny in Brussels: for example, a merger of its Italian unit with Fastweb, a broadband operator owned by Swisscom SA. The question would be whether Vodafone and Swisscom could agree on price.

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