Proposed acquisition by Cable and Wireless Group plc of the outstanding Thus Group shares

Affected market: Telecommmunications

No. ME/3752/08

Please note that the full text of the decision can be downloaded by using the link on the right. What follows are extracts regarding the parties, the transaction, jurisdiction, third party views, assessment and decision.

The OFT's decision on reference under section 33(1) given on 12 September 2008. Full text of decision published 23 September 2008.

Please note that square brackets indicate figures or text which have been deleted or replaced at the request of the parties for reasons of commercial confidentiality.

PARTIES

Cable & Wireless plc (C&W) is an international communications provider (CP) active in the UK supply to business customers of fixed line telecommunications and related services.

Thus Group plc (Thus), headquartered in Glasgow, is a UK-focused CP active in the supply principally to business customers of fixed line telecommunications and related services.  In the previous financial year ending 31 March 2008, Thus' turnover amounted to around £575 million.

TRANSACTION

On 30 June 2008, C&W announced that it had acquired a 29.9 per cent shareholding in Thus and that Thus' directors had agreed to put to its shareholders C&W's public offer for the remaining shares. The administrative target date for the OFT's decision on reference is 12 September 2008.

JURISDICTION

4. As a result of these transactions, C&W and Thus would cease to be distinct. Given that Thus' UK turnover exceeds £70 million, the turnover test in section 23(1)(b) of the Enterprise Act 2002 (the Act) is satisfied. The OFT therefore believes that it is or may be the case that arrangements are in progress or in contemplation which, if carried into effect, will result in the creation of a relevant merger situation. [See note 2]

THIRD PARTY VIEWS

Comments were received from a total of 39 third parties, of whom 28 were customers.

The OFT has also consulted Ofcom, who are of the view that the merger raises no competition concerns.

Two financial institutions expressed concerns for the possibility of adverse impact on competition, as a result of the loss of Thus as an independent competitor in the supply of business data communications. These concerns have been addressed in the context of this decision.

The vast majority of third parties expressed no concerns with regard to the merger. Several were of the view that the acquisition of Thus would afford C&W greater geographic coverage and consequently reduce its requirement at both wholesale and retail levels to incur costs in integrating connectivity from other CPs. The same third parties discussed the potential for the integration of the two networks to bring about efficiencies that would result in customer benefits as a result of increased rivalry to BT. The OFT's assessment of such arguments on the part of customers for efficiency benefits is set out below.

Efficiency arguments

The OFT notes that the reach of C&W's proprietary telecoms network will be extended as a result of its acquisition of Thus. According to data provided by Ofcom, around 50 per cent of Thus' proprietary network is complementary to C&W's network.

In order to provide their customers with national and international telecoms coverage, C&W and Thus rely on other CPs - principally the dominant supplier BT - to provide the physical connectivity necessary for such national and global reach. At present, both parties are currently obliged to incur costs handing over part of their respective customers' data and voice traffic to BT in order to establish connectivity with the intended recipients. The costs that C&W incurs in making use of other CPs' networks are partly functions of (in the case of BT) regulation, and (in all cases) the distance over which C&W's customers' voice and data signals are carried back and forth on one (or more) rival CP's infrastructure.

A large body of third party comment supports C&W's proposition that efficiencies accrue to the fact that more traffic will be carried for longer on the parties' combined network. In particular, post merger, C&W will pay less to BT as a result of being able to use its proprietary infrastructure at the retail level to deliver more of its own (and Thus') customers' telecoms traffic.

Additionally, third parties commented to the OFT that the network effects attributable to the extended reach both of C&W's connective infrastructure on the one hand, and of the increment in its resident customer bases on the other, are capable of generating additional revenue for C&W by making of it a more effective post-merger competitor to BT in the wholesale supplier of telecoms connectivity.

While the OFT considers there is some merit in the parties' efficiencies claims, it did not need to conclude on either the magnitude of future cost savings or additional revenues, or to substantiate the extent to which the benefits that arise from ostensibly rivalry-enhancing efficiencies will be passed on to C&W's customers at both the retail and the wholesale levels given that the transaction does not raise competition concerns.

In light of the available evidence that the merger will not lead to a substantial lessening of competition, however, the OFT considers that is not necessary to reach any conclusion on the merits or otherwise of the arguments for the merger generating rivalry enhancing efficiencies.

ASSESSMENT

C&W and Thus overlap principally in the provision in the UK of voice and data telecommunications: an industry in which the previous monopoly supplier, BT, continues to have significant market power and which is therefore subject to regulation by Ofcom.

Comments on the proposed merger were received from a total of 39 third parties, of whom 28 were customers. Given the interplay between regulation and the post merger constraint posed by competitors, the lack of concern for the merger's impact on competition was unanimous in the voice segment. Whilst a minority of two customers expressed concerns in the data segment, the OFT considers that the evidence available both from Ofcom and from the parties (including bidding data) underpins comments received from the overwhelming majority of customers in the data segment who, also on the basis of the regulatory regime and of the availability of post merger competitive constraint, were unconcerned.

Having assessed the evidence, the unique attributes of both the merger and of the industry, the OFT considers that there is also merit in the submissions made by the parties and by third parties on the potential for rivalry-enhancing efficiencies resulting from the merger. However, the OFT did not need to conclude on this issue given that the transaction does not raise competition concerns.

Consequently, the OFT does not believe that it is or may be the case that the merger may be expected to result in a substantial lessening of competition within a market or markets in the United Kingdom.

DECISION

This merger will therefore not be referred to the Competition Commission under section 33(1) of the Act.

NOTES

2. The OFT has conducted its analysis on the basis of the anticipated acquisition by C&W of the outstanding Thus shares. It considered that it did not need to assess whether the completed acquisition by C&W of 29.9 per cent of the issued share capital of Thus constituted an acquisition of material influence, or the competition effects of such acquisition, on the basis that this completed acquisition is not capable of raising any additional concerns not considered as part of the anticipated acquisition of the outstanding Thus shares.

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