TEF Telefonica SA

By Natalia Drozdiak and Valentina Pop 

BRUSSELS--The European Commission is set to torpedo CK Hutchison Holdings Ltd.'s planned multibillion-dollar takeover of Telefónica SA's British cellphone operator O2, two people familiar with the matter said, highlighting the hardening approach by EU regulators toward consolidation in the fragmented telecommunications industry.

The EU's 28 commissioners are scheduled to approve the decision by the bloc's antitrust watchdog on Wednesday, the people said, after the companies failed to assuage the 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.

European Union antitrust chief Margrethe Vestager 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 decision in the U.K. deal reinforces the EU's course for future telecom merger reviews, including its probe into Hutchison's plans in Italy to merge its 3 Italia business with Russian telecom firm 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 much more data as they watch more videos on smartphones.

In the U.K., the purchase of Telefónica's British mobile operator by Hong Kong tycoon Li Ka-shing's Hutchison would have combined O2, the country's second-largest mobile operator and Three U.K, Britain's fourth-largest operator. The acquisition, announced in 2015, would have more than tripled Three's U.K. subscribers to 34 million and would create the country's biggest mobile operator.

Hutchison and 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 its U.K. mobile network to competitors, allowing them access to the network as well as additional rights, such as influence in network investment decisions.

Hutchison also said they 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.

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

Telefónica executives said last week they were leaving open the possibility that EU regulators would block the sale of its U.K. unit to Hutchison. They highlighted the unit's strong performance in the first quarter of this year, which leaves open various options--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, said Telefónica Chief Strategy and Finance Officer Ángel Vilá.

Telefónica chairman José María Álvarez-Pallete said 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 on June 23rd 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 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 03, 2016 10:18 ET (14:18 GMT)

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