TEF Telefonica SA

By Natalia Drozdiak and Valentina Pop 

BRUSSELS -- The European Commission is set to torpedo CK Hutchison Holdings Ltd.'s planned deal to buy British mobile operator O2 for around $14 billion, two people familiar with the matter said, as EU regulators take a hardened approach toward telecom consolidation.

European Union commissioners are scheduled to approve the decision by the bloc's antitrust watchdog on Wednesday, the people said, after the companies failed to assuage regulator's concerns the deal would lead to higher prices and less choice for U.K. consumers.

The item is on the agenda for the weekly meeting of the 28 EU commissioners, where the decision is usually a formality.

The commission and the companies declined to comment.

The purchase of Telefónica SA's O2 by Hong Kong-based CK Hutchison would have combined the U.K.'s second-largest mobile operator with Three U.K., the fourth-largest operator and CK Hutchison's existing British carrier. The acquisition, announced in 2015, would have more than tripled Three's U.K. subscribers to 34 million and created the country's biggest mobile operator.

Margrethe Vestager, the EU's antitrust chief, has taken a tough stance against telecoms mergers in the region, particularly in cases where deals reduce the number of mobile-telecom operators in a given country from four to three, as would be the case in the U.K. deal. The first such deal to be reviewed under Ms. Vestager's watch, in Denmark, was abandoned last year following resistance from Brussels.

The commission's expected decision in the U.K. deal reinforces the EU's course for future telecom merger reviews, including its probe into CK Hutchison's plans in Italy to merge its 3 Italia business with Russian telecom company VimpelCom Ltd.'s Wind Group -- another so-called "four-to-three" merger.

"It seems to be a key turning point because of what happened in Denmark last year," said Adrian Baschnonga, a telecoms analyst with Ernst & Young. "A lot of the industry thinks that the European attitude toward consolidation is hardening."

Mobile operators say mergers, and the price increases that may come with them, are necessary so that they can build better networks, especially since consumers are using more data as they watch more videos on smartphones.

CK Hutchison, the flagship company of Hong Kong tycoon Li Ka-shing, and Spain's Telefónica in early March submitted commitments to the EU to help push the deal through, but the EU's antitrust body has deemed them insufficient.

The companies offered to sell fractional ownership stakes in their U.K. mobile network to competitors, allowing them access to the network as well as additional rights, such as influence in network investment decisions.

CK Hutchison also said it would freeze prices for customers for five years, though EU antitrust regulators can't accept such a pledge as a formal commitment since the remedies need to be structural, such as creating a new mobile network operator.

The Hong Kong-based company, which in recent years has been buying and merging with other mobile carriers in Europe in a bid to cement itself as one of the bloc's top wireless providers, can appeal the commission's decision in the U.K. case.

Telefónica executives said last week that they were leaving open the possibility that EU regulators would block the sale of its U.K. unit to CK Hutchison. They highlighted the unit's strong performance in the first quarter of this year, which they said opens up various possibilities -- such as finding another buyer or keeping the unit -- if the deal does fall through.

"We have many options" if the deal with Hutchison doesn't go through, Ángel Vilá, Telefónica's chief strategy and finance officer, said during a presentation to analysts on Friday.

Telefónica Chairman José María Álvarez-Pallete also said Friday that a legal analysis of the transaction would allow the deal to clear all regulatory reviews and that if the sale were killed, it would be for "political reasons."

With the U.K. set to vote June 23 on whether to remain in the EU, some lawyers say that may have added to the pressure on the commission to decide against the deal, in favor of the British regulators.

Both the U.K.'s Competition and Markets Authority and its communications regulator Ofcom have v oiced their concerns about the deal, saying it would kill competition and innovation, and lead to higher prices for British consumers.

--Stu Woo in London and Jeannette Neumann in Madrid contributed to this article.

Write to Natalia Drozdiak at natalia.drozdiak@wsj.com and Valentina Pop at valentina.pop@wsj.com

(END) Dow Jones Newswires

May 04, 2016 02:49 ET (06:49 GMT)

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