OREANDA-NEWS. September 15, 2015. Fitch Ratings says the withdrawal of the planned merger between TeliaSonera (A- / Stable) and Telenor of their respective business units in Denmark is potentially negative for incumbent TDC (BBB / Negative) as it would have benefited from less competitive intensity and reduced market risk. TDC faces stiff competition in its domestic market where regulatory and pricing pressures remain strong.

While a merger of the two businesses would result in a stronger number two competitor, due to the size of the Danish market the reduction in the number of mobile operators from four to three is likely to create a more sustainable market structure overall, compared with facing a larger number of sub-scale operators that primarily compete on price.

Telenor and TeliaSonera are the second- and third-largest operators in the Danish market operating across mobile and fixed segments. Through merging their businesses both operators were seeking to improve their return on investment, which due to current low margins does not incentives them to invest strongly into their operations. The merged entity would have had greater scale, with market share in the mobile segment exceeding 45% that would have allowed cost synergies exceeding DKK800m.

Telenor and TeliaSonera had offered European regulators the creation of a network JV as a means to meet regulatory remedies. The operators were willing to allow a third party to take a significant stake in the JV along with the transfer of some subscribers. While an innovative approach, the proposal does not seem to have been sufficient to meet regulatory requirements on its own. Historically, the European Commission has allowed mergers between the third-and fourth-largest mobile operators which have overall lower total scale. Depending on the market, mobile consolidation deals have also involved the divestment of spectrum, retail and other infrastructure asset, along with guarantees that ensure that the wholesale market remains robust and dynamic. It is not clear to what extent these were part of the negotiations with the European Commission.

It is therefore difficult to say if there is a change in policy or a stricter regulatory regime developing in the European Union with regard to telecoms mergers following the recent appointment of Margrethe Vestageras Competition Commissioner in October 2014.

There are currently two other European deals awaiting EU approval - Hutchison's acquisition of Telefonica O2 in the UK and the merger of Wind and Hutchison in Italy. However, these transactions involve the smallest of the market participants in each country. The shareholders of these entities have successfully completed similar mergers in Germany and Ireland with asset disposals and providing structural guarantees in the wholesale market.

In Denmark, the low return on investment experienced by alternative telecoms operators implies that market consolidation may still happen, possibly in another form, while alternative options to improve margins will continue to be explored.