The European Commission has blocked Three UK owner Hutchison Whampoa's £10.25bn deal to acquire rival O2 from Spanish national telecoms operator Telefónica.
Hutchison announced its intention to buy O2 in January 2015 but the deal, which would have made Three the biggest mobile operator in the UK, faced scrutiny by the European Union's competition authorities.
In response, Hutchison indicated that it was prepared to sell off network capacity and frequencies to assuage the EC's concerns.
But the EC said in Brussels today that it has blocked the acquisition after concerns that UK mobile customers would have had less choice and paid higher prices as a result of the takeover, and that the deal would have harmed innovation in the mobile sector.
The merger would have left the UK with only three mobile operators: Three UK, Vodafone and BT's EE.
The EC investigation found that the takeover would have had a negative impact on quality of service for UK consumers by hampering the development of mobile network infrastructure in the UK. The takeover would also have reduced the number of mobile network operators willing to host other mobile operators on their networks.
Remedies proposed by Hutchison "failed to adequately address the serious concerns raised by the takeover", the EC said.
Hutchison had proposed to give access to a share of the merged entity's network capacity to one or two mobile virtual operators, and divest O2's stake in the Tesco Mobile joint venture while offering a wholesale agreement for a share of its network capacity to Tesco Mobile.
The company also proposed to offer a wholesale agreement for a share of its network capacity to Virgin Media.
The EC suggested that even if those offers were taken up, the mobile virtual operators would have been commercially and technically dependent on the merged entity, with limited ability or incentive to differentiate their offerings, including in terms of network quality.
Other suggested remedies were "commercially unattractive" or "difficult to implement", the EC ruled.
Competition commissioner Margrethe Vestager said: "Allowing Hutchison to take over O2 at the terms they proposed would have been bad for UK consumers and bad for the UK mobile sector.
"We had strong concerns that consumers would have had less choice finding a mobile package that suits their needs and paid more than without the deal.
"It would also have hampered innovation and the development of network infrastructure in the UK, which is a serious concern especially for fast moving markets. The remedies offered by Hutchison were not sufficient to prevent this."
Three UK said that it is "deeply disappointed" by the EC's decision, and will consider its options, including the possibility of a legal challenge.
O2 had no specific comment to make but said that its business "has continued to perform well in the market while the EC process has taken place".
Kester Mann, principal analyst at CCS Insight, suggested that the most likely outcome for O2 is selling up to private equity.
He claimed that Liberty Global, which owns Virgin Media, could also consider a bid, and that a sale, or partial sale, to a deep-pocketed operator from outside the UK, such as Softbank or America Movil, could also be plausible.
"For the time being, however, O2's parent Telefónica may elect to hold on to an asset that in recent years has impressively out-performed rivals despite its uncertain future," Mann said.
He added that Three's future looks "vulnerable" in a market rapidly transitioning to multiplay, and that a possible option would be to acquire TalkTalk.
"Such a deal would not attract major competition concerns and would offer greater scale as well as a position in the rapidly growing UK multiplay market," he said.
Alex Neill, director of Policy and Campaigns at Which?, welcomed the decision.
"It's right that the European Commission has taken a strong position and acted in the interest of consumers. Telecoms are an essential part of everyday life and this decision, to protect competition and choice, should prevent UK mobile customers losing out."
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