Telecoms Update: Autumn 2019
Welcome to the Autumn edition of our Telecoms Update. In this issue we review telecoms regulatory updates and five lessons from telco joint ventures.
Telecoms Regulatory Updates
ComReg and Sky settle dispute over eir broadband charges
In December 2018, ComReg published two decisions in respect of wholesale broadband: ComReg Decision D10/18 designated eir with significant market power on the wholesale local access market and regional wholesale central access market and imposed a number of obligations on eir under the Access Regulations 2011; and ComReg Decision D11/18 further specified the cost-orientation and transparency obligations imposed.
Sky lodged an appeal against the decisions on 14 December 2018 claiming that they contained significant errors of fact and appraisal and were contrary to fair procedure and the requirements of EU law and the Irish constitution. Among other issues, Sky claimed that the decisions resulted in the cost for switching from one TV/broadband to rise to €170 from €2.50. Both eir and Vodafone were joined as notice parties to the case.
It was announced on 16 October 2019 that Sky and ComReg had reached a settlement in respect of the proceedings. Sky agreed to withdraw the appeal and ComReg provided a number of confirmations, including that it will publish a consultation document on the new “Access Network Model” in Q1 2020 and it will issue a response to consultation in respect of its consultation on weighted average cost of capital (WACC) in Q1 2020. ComReg will also assess the implications of the new Access Network Model for Fibre-to-the-Cabinet pricing.
Preparation underway for implementation of the European Electronic Communications Code (“EECC”) in Ireland
The adoption of the EECC marks a significant revision of the EU framework for telecoms regulation, as it consolidates and updates the existing EU directives which regulate electronic communications services and networks. The core objectives of the EECC are to promote connectivity to high capacity networks across the EU, develop an internal market for telecoms, and provide greater protection for consumers.
The deadline for transposition of the EECC in Member States is 21 December 2020, and the Minister for Communications, Climate Action and Environment has confirmed that the EECC will be transposed by Ireland in late 2020.
ComReg has begun preparation for implementation of the EECC and announced that it will host a regular “Industry Forum” for all authorised Undertakings to discuss operational and implementation aspects of the new regime. ComReg has initially focused on the delivery of relevant emergency communications to the Emergency Call Answering Service in compliance with the EECC.
A number of key milestones reached in respect of settlement between incumbent and Regulator
In December 2018, the Commission for Communications Regulation (ComReg) and eir entered into a settlement agreement to resolve a number of compliance disputes in respect of eir’s obligations under the Access Regulations 2011 and eir’s internal governance structures.
The settlement agreement aims to establish an enhanced regulatory governance model in eir and provides for the creation of an independent committee and the placement by eir of €9 million in escrow. A number of key performance milestones under the settlement agreement have been reached over the last number of months.
In January 2019, eir appointed two members to the Independent Oversight Body (IOB) which was fully established in May 2019. The IOB consists of five members in total; the remaining three members, including the Chairperson, are independent and appointed by ComReg. The IOB is tasked with overseeing and assessing eir’s regulatory governance arrangements, among other functions.
In addition, eir also met all its “early” performance milestones by the agreed May 2019 deadline and ComReg instructed the Escrow Agent to repay eir a sum of €4.5 million. Such early performance milestones included the development of an overarching policy on the management of confidential regulated information and the development of a protocol for the implementation of all future new systems that will ensure compliance with eir’s regulatory obligations.
ComReg is currently consulting on updating numbering conditions of use and number application process and reviewing WACC
ComReg has published a draft update to the Numbering Conditions of Use and Application Process (Numbering Conditions), inviting stakeholders to comment on the proposed updates. A key element of the consultation is the incorporation of conditions of use for new machine-to-machine numbers introduced by ComReg in 2018, which largely focus on facilitating the use of mobile network numbers extraterritorially across the EU. The proposed updates also support the Non-Geographic Number (NGN) implementation project and aim to simplify the tariff systems applicable to NGNs and consolidate the numbering class system.
ComReg is also conducting a review of its approach to estimating the WACC in three sectors: mobile telecommunications, fixed line telecommunications and broadcasting. ComReg’s review aims to avoid excessive prices being charged by operators with significant market power and to “promote a favourable climate for efficient and timely investment and innovation in telecommunications and broadcasting infrastructure and services in Ireland”. ComReg has confirmed it will issue its response to this consultation in Q1 2020.
ComReg market report for Q2 2019 shows increase in average monthly data usage in fixed and mobile
According to ComReg’s Quarterly Report for Q2 2019, average monthly data usage per fixed broadband subscription increased from Q2 2018 by 18.8% for residential consumers and 54.9% for business consumers. ComReg also noted increasing consumer take-up of higher speed fixed broadband products with products reaching speeds of over 100Mbps seeing an increase of 5.8% from Q2 2018.
With respect to mobile usage, ComReg reported that 55.0% of all mobile subscriptions were actively using 4G networks in Q2 2019 (up from 52.4% in Q2 2018) and that the monthly usage for the average mobile voice subscriber in Q2 2019 was 208 minutes used, 62 texts sent and 6.74 GB of data used.
Five Lessons from Telco Joint Ventures
Joint ventures continue to be a popular structure in the telco market from which a number of key points emerge.
Whether the joint venture triggers the requirement for Irish merger clearance under the Competition Act 2002 (as amended) will be one of the key early considerations, having a major impact on timetable and execution risk. Much will depend on the status of the parties (whether both are current market players or if one is a PE funder, will each have a major bearing) and the functions carried out by the JV (a stand-alone JV company compared to a sharing of passive assets will lead to very different considerations). The key issues will be whether control or joint-control of a full-function JV arises, and whether the financial thresholds are met:
- “Control” under the Competition Act means the ability of the acquiring party to exert “decisive influence” over the strategic commercial behaviour of the acquired undertaking or asset. Joint control will arise when two or more undertakings have the possibility of exercising decisive influence over the joint venture. The fundamental characteristic of joint control is the power of two or more parent companies to veto proposed strategic decisions, such as the approval of the annual budget or business plan, appointment of senior management and making of key investments. Such veto rights can be sufficient in and of themselves to confer “control” for the purposes of the Competition Act
- A joint venture will be considered “full-function” if it performs, on a lasting basis, all the functions of an autonomous economic entity. The joint venture must have sufficient resources to enable it to independently perform the functions normally carried out by other undertakings operating on the same market and the joint venture must be intended to operate on a lasting basis. Where a joint venture does not qualify as full-function, it may still be assessed under the rules on restrictive agreements under the Competition Act, which are in all material respects identical to the equivalent EU rules.
- Once the criteria for joint control and full-functionality have been met, the joint venture will be notifiable under the Competition Act if the financial thresholds are met. The thresholds were raised in January 2019. The thresholds are that in the most recent financial year of each undertaking involved: (i) the aggregate turnover in Ireland of the undertakings involved is not less than €60 million; and (ii) the turnover in Ireland of each of two or more of the undertakings involved is not less than €10 million.
The undertakings involved in the acquisition of joint control in a newly-created joint venture company are each of the parents acquiring control, while the undertakings involved in the acquisition of a pre-existing joint venture company are both the parents and the joint venture company. Changes from joint control to sole control of a joint venture may also fall under the Competition Act; in such cases the undertakings involved are the shareholder acquiring sole control and the joint venture company.
Irish merger control practice and procedure closely follows the approach of the European Commission, and the processes laid down in the EU Merger Regulation and the Consolidated Jurisdictional Notice, in particular with respect to the concepts of control and full-function joint ventures.
Facilitating further opportunities to be exploited together on future projects is often an important feature of telco joint ventures. A common approach is for the parties to agree that any opportunities that arise in a specified market should be brought to the joint venture. The rationale for the further opportunities concept is twofold. First, the concept is a common feature in sectors where the number of opportunities of sufficient scale that arise can be relatively limited. Second, the parties to the joint venture will have invested a significant amount of time and capital in the first venture and if that time and capital can be used efficiently for another project, the best approach is to give such opportunity to the joint venture for the benefit of both parties. What happens if the opportunity is not taken up by the joint venture is usually the subject of some debate, which needs to take into account commercial objectives and competition law considerations.
This is an area of particular focus on any joint venture because of the prevalence of infrastructure funds investors in the telco sector who will not want to be restricted in anything but the narrowest of geographical markets. Even if the original joint venture parties are not investment funds, all market participants will understand that the liquidity of the investment will be heavily reliant upon funds not being locked out of markets. However, from the perspective of the parties to the joint venture in maximising returns on its investment and due to investors being active across European markets, protecting and maximising the value of an investment can often involve detailed consideration regarding the application and scope of non-compete provisions.
Further Capital Requirements
Whilst further capital requirements are always a consideration for joint ventures, it is a particularly difficult issue to future proof in a capital intensive business. The usual solution is that ceilings are established such that sufficient committed capital (with headroom) is available to the business but the headroom is not so material that either party loses control over the extent and objective of the overall investment. The difficulty with this approach is that once such ceilings are reached, even where it is obviously commercially beneficial to continue investing in the joint venture, the investment decision can be dependent on numerous factors external to the business of the joint venture such as other capital commitments of the parties, changed business focuses of the parties etc.
The importance of an exit mechanism (whether individually or a forced sale of the entire venture) becomes clear in these circumstances. Beware of common mistaken beliefs that in such circumstances (i) a pre-emption right on fresh issues of securities is the solution – neither party will want to lose control of the joint venture so will have a veto on any fresh issues of equity or debt (ii) a dispute resolution process is the solution – this is not a dispute issue, it is simply a business decision that requires alignment and neither party will agree to be forced into funding or (iii) that maintaining the status quo will work – in the fast moving and capital intensive telco sector, this is rarely a solution.
There can be material divergences of views on whether profits should be distributed or reinvested. Whilst it is difficult to get it right, the parties should consider some level of trying to future proof the joint venture so that their interests can be tradeable/replaceable. The balance between competing capital structures of (i) dividend paying telcos and (ii) exit focused funds needs to be taken into account. As with further capital requirements considerations, the exit mechanism is a key feature for parties in this sector who may develop divergent needs.