Hong Kong Communications Authority clears HKT/CSL merger subject to conditions
Antitrust clearance was required under the Telecommunications Ordinance, as both parties have subsidiaries – “HKT” and “CSL,” in short – which hold telecommunications carrier licenses.
The CA examined the impact of the transaction in a number of “relevant markets,” and found issues in two of them: retail mobile telecommunications, and wholesale access to mobile network for mobile virtual network operators (“MVNOs”).
In retail mobile telecommunications, the CA found the transaction to raise anti-competitive “unilateral effects” – that is, the authority was concerned that the merged HKT/CSL entity would be able to raise prices unilaterally after the transaction. To reach this conclusion, the CA had to navigate around its own guidelines which stipulate that aggregate market shares below 40% would unlikely lead to a finding of “substantially lessening of competition” – the legal test for merger control under the Telecommunications Ordinance. Indeed, in terms of revenues, spectrum and (total) subscriber numbers, the merged entity’s market share was below 40%, though at times just barely.
In its analysis, the CA focused on narrower segments of the retail mobile telecommunications market, where the parties had somewhat higher market shares, and relied on a study by a group of consultants which had resorted to relatively complex assessments based on diversion ratios, win/loss data, cross-price elasticity and pair-wise correlation of market shares.
Beyond market shares and sales data, the CA held the limited spectrum available for mobile communications – in the long term – to be a factor reinforcing the merged entity’s market power post-transaction.
In turn, the CA did not find negative “coordinated effects” to exist in the retail mobile telecommunications market; it found the risks of coordination between the merged entity and other mobile telecommunications operators to be low, somewhat incongruently pointing to the dynamic nature of competition in the market.
In the market for wholesale access to mobile networks, the CA also identified anti-competitive effects. The authority considered the transaction a 3-to-2 merger, threatening to cut off access to mobile networks for MVNOs, which it considered to be an important competitive constraint.
In contrast, the CA decision did not find negative effects on competition in other relevant markets including backhaul services, interconnection services, and international roaming services.
Perhaps with foresight, the acquirer, HKT, had pre-emptively proposed commitments to address potential concerns the CA may have. The authority accepted the majority of the commitments, and did not request further concessions.
The substantive remedies were formulated as directions upon the merged entity:
- to “divest” certain 3G spectrum by not renewing part of its current spectrum after expiry in October 2016
- not to participate in any 3G spectrum auction for five years
- to inform the CA and competitors of closures of base transceiver stations
- to continue granting wholesale network access to MVNOs
- to respect its existing 3G network capacity sharing agreement with a particular competitor, CMHK.
The HKT/CSL merger was a hotly contested transaction. The CA received 27 submissions from third parties, and engaged economic consultants performing detailed studies.
Although the aggregate market shares were below the benchmark level in its own guidelines, the authority found anti-competitive effects to exist. It explicitly stated that the guidelines “do not set out a legal safe harbour” in the particular transaction.
The CA’s decision may have an impact beyond the specific case and the application of the Telecommunications Ordinance. As the CA is gearing up to issue guidelines on the enforcement of the Competition Ordinance – jointly with the Hong Kong Competition Commission (“HKCC”) – the HKT/CSL decision comes as a timely reminder for market players that guidelines are not “hard law.”
Given that the CA shares the power to enforce the Competition Ordinance with the HKCC in the telecommunications and broadcasting sectors, it may be reasonable to expect similar cases in these sectors – whether mergers or “conduct cases” – with economics-heavy analyses in the future.