EC, August 11, 1998, No JV.4

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

Dear Sirs,

Subject : Case No. IV/JV.4 - Orange/Viag

Notification of 10 July 1998 pursuant to Article 4 of Council Regulation No. 4064-89

1. On 10 July 1998, the Commission received a notification of a proposed concentration pursuant to Article 4 of Council Regulation (EEC) No 4064-89 (1) by which the undertakings Orange Overseas Holding Limited ("OOH") and VIAG AG, acting through its wholly owned subsidiary VIAG Interkom Verwaltungs GmbH ("VIAG") create, within the meaning of Article 3 (1) (b) of the Merger Regulation, the joint venture company Orange Communications SA ("Orange SA").

2. After examination of the notification, the Commission has concluded that the notified operation falls within the scope of Council Regulation (EEC) No 4064-89, and does not raise serious doubts as to its compatibility with the Common Market.

I. PARTIES

3. VIAG AG is the ultimate parent company of the VIAG Group, an internationally active diversified group having businesses in the area of energy, chemical products, packaging, logistic and telecommunications (through VIAG Interkom GmbH & Co.).

4. Orange plc is the ultimate parent of the Orange Group, which provides communications services, its core activity being the operation of the Orange DCS 1800 network in the United-Kingdom and the sale of Orange network services. Its indirect wholly-owned subsidiary OOH is a holding company of mobile network participations in Austria, Belgium, and Switzerland.

II. OPERATION

5. In February 1998, OOH and VIAG ("the founding shareholders") founded Orange SA with a view to participate in the invitation for bid initiated by the Federal Government of Switzerland for two national GSM 900/DCS 1800 mobile telephone licences. The shareholders agreement between the founding shareholders was signed on 10 February 1998. Subsequently, Swissphone Engineering AG ("Swissphone") took over a 20% interest and Banque Cantonale Vaudoise SA ("Vaudoise") took over a 10% interest in the joint venture from the founding shareholders. The bid was successful, Orange SA was granted a licence on 29 May 1998 and is building up a DCS 1800 network in order to exploit the licence.

III. CONCENTRATION

Joint-control

6. According to the articles of incorporation and the shareholders agreement, Orange SA is a stock company under Swiss law which was initially held to 50% by each of the founding shareholders. Following the acquisition, from the founding shareholders, of a 20% interest by Swissphone and a 10% interest by Vaudoise in the joint venture, the shareholders' interests currently are as follows: OOH and VIAG each hold 35%, Swissphone holds 20% and Vaudoise holds 10% of the shares of the joint venture. It is envisaged that, as soon as Orange SA is sufficiently well established, shares of the company will be offered to the public and listed at the stock exchange. However, the founding shareholders, OOH and VIAG, will retain the majority of the shares (at least 51%) in Orange SA

7. The board of directors manages the current business of Orange SA. According to Art. VI.1 of the shareholders agreement, each founding shareholder holding more than 20% of the shares has the right to designate three directors and other shareholders have the right to designate one director for each 10% of the shares. According to Art. III.5.7 of the shareholders agreement, the General Assembly can elect additional directors by a majority of at least two-thirds of the votes.

8. It results from the above that, as long as they retain at least 51% of the shares, OOH and VIAG will have the majority at the board of directors level.

9. Without the approval of at least one of the directors designated by each of the founding shareholders, no resolution of the board of directors can be passed. According to Art. VI.3 of the shareholders agreement, most resolutions of the board of directors (including those on the budget and the business plan) are validly adopted if they are supported by a majority of all directors, including at least one appointed by each of the founding shareholders. In addition to that, for a certain number of resolutions, such as the designation of the chairman and the vice-chairman, the appointment and removal of the CEO, the approval of a share transfer and entry of the new shareholder, as well as organisational changes, the majority of the directors designated by the founding shareholders is required. Consequently, both OOH and VIAG have in any case the right to veto decisions which are essential for the business of Orange SA and both of them thus have decisive influence in the sense of article 3 (3) of the Merger Regulation.

10. Moreover, on 20 May 1998, OOH and VIAG entered into a pool voting agreement regarding Orange SA, according to which they will vote or abstain to vote in a uniform manner in the general assembly of Orange SA. To the extent legally permissible, they will also instruct their members in the boards of directors of Orange SA to achieve a unanimous voting in the meetings of the board. Therefore, the pool voting agreement ensures a unanimous exercise of voting rights by the founding shareholders in both the general assembly and the board of directors. It thereby strengthens the joint control already resulting from the shareholders agreement.

11. Orange SA is therefore jointly controlled by OOH and VIAG. The admission of additional shareholders is conditional upon the signing of the shareholders agreement. This ensures that any such entry would not alter the situation of joint control by OOH and VIAG.

Full-function entity

12. The shareholders have planned for Orange SA to perform all functions of an autonomous economic entity as a telecommunications network operator in Switzerland. Orange SA has been granted by the Swiss authorities a licence to build and operate a DCS 1800 telecommunications network. Orange SA will build and operate its own network and will provide mobile telecommunications services in Switzerland. It will directly operate on the market by offering its services to private individuals and the business community.

13. Orange SA intends to invest SFr 700 million in its DCS 1800 network. According to its business plan, its capital expenditures for 1998 amount to approximately SFr 240 million. To ensure the financial independence of Orange SA, the founding shareholders agreed to provide additional funding necessary for the establishment of the mobile phone network and the exploitation of the licences (Article 8.1 of the Shareholders Agreement). Orange SA will have its own management and its own workforce. At the end of the year, it will have about 400 employees. By 2003, this figure will increase to 1000.

14. The shareholders agreement is valid for twenty years. Orange SA was founded for an indefinite term and its dissolution is restricted to cases which are provided for by law.

15. Orange SA will accordingly perform on a long-lasting basis all the functions of an autonomous economic entity.

IV. COMMUNITY DIMENSION

16. The combined aggregate world-wide turnover of VIAG (23,830 MECU) and Orange (1,319 MECU) exceeds ECU 5 billion. The aggregate Community-wide turnover of each of these companies is more than ECU 250 million. VIAG does not achieve more than two-thirds of its Community-wide turnover in one single member state. The concentration therefore has a Community dimension within the meaning of Article 1 of the Merger Regulation.

V. RELEVANT PRODUCT MARKET

17. Orange SA intends to install and operate a mobile telecommunications network using the DCS 1800 standard which operates within the 1800 MHz bandwidth. This standard differs from the GSM (Global System for Mobile Communications) standard which operates within the 900 MHz bandwidth.

18. In the past, the Commission has considered that there were indications that systems such as DCS 1800 are used to operate on a market which is different from the one on which GSM services are provided. Networks using the DCS 1800 standard require a denser system of transmitters and rather aim at local or regional users. Furthermore, a DCS 1800 telephone cannot log into a GSM network. A dual mode handset is needed to interface between the two standards. The number of international roaming agreements (which are widespread for GSM networks) is still rather limited for DCS 1800 networks. According to a recent study, on 1 March 1998 there were around 46.1 million subscribers of GSM systems and somewhat more than 4.1 million subscribers of DCS 1800 networks in Western Europe. Furthermore, the price for a GSM subscription tends to be higher than a DCS 1800 subscription.

19. This conclusion may no longer be valid at present since convergence of the two systems is increasingly taking place. There are indeed strong indications for the Commission to believe that the product market is now made up of digital mobile telecommunications services, notwithstanding the standard they use. For instance, GSM/DCS 1800 dual mode mobile handsets, which allow the user to use both frequencies by switching automatically from one to the other, are already available on the market and are increasingly widespread. Furthermore, the Commission has found that customers now tend to demand to be able to roam between DCS 1800 and GSM networks, which again indicates that those dual handsets will become the norm (see cases IV/JV.2 - FT/DT/ENEL/Wind and IV/JV.3 - BT/AirTouch/Acciona/Airtel).

20. However, the definition of the relevant product market may be left open in the present case. Indeed, even if DCS 1800 services were to be considered as a separate product market, the concentration would not create or strengthen a dominant position as a result of which effective competition would be significantly impeded in the common market or a substantial part thereof, as it is set out in the competitive assessment under point VII. below.

VI. RELEVANT GEOGRAPHIC MARKET

21. The scope of the relevant geographical market in telecommunications is determined by the extent and coverage of the network and the customers that can economically be reached and whose demands may be met and on the one hand by the legal and regulatory system on the other hand. In the present case, the parties submit that the relevant geographical market is the Swiss market, because the licence granted to Orange SA is limited to the Swiss territory and access to foreign networks via international roaming agreements do not provide an interchangeable solution, notably because of the higher price level.

22. However, the Commission has recently pointed out that in view of the degree of substitutability between subscriptions taken out in different countries, there is an increasing trend towards a European market for mobile telephony service provision (case IV/JV.2 - DT/FT/ENEL/Wind).

23. In the present case, the definition of the relevant geographical market may nevertheless be left open since, on the basis of the assessment set out below, the concentration would not in any event create or strengthen a dominant position, as a result of which effective competition would be significantly impeded in the Common Market or a substantial part thereof.

VII. COMPETITIVE ASSESSMENT

A. Dominance

24. Orange SA is a new entrant on the Swiss mobile telephony market and will, assuming that DCS 1800 and GSM services are part of the same market, have to compete with Swisscom Mobile, which is already operating, and with Diax Mobile AG, which has been granted a GSM 900 licence recently and will enter the market soon. According to the notifying parties, Orange SA expects to be operational in big cities at the end of 1998 and to reach 50% national coverage in 1999 as well as full national coverage in Switzerland at the end of 2000.

25. The joint venture company itself will only operate in Switzerland which is outside the EU. The Commission is therefore not competent to make a competitive assessment as to the creation or strenghtening of any possible dominant position on this market.

26. By contrast, such an assessment is possible if the DCS 1800 market can be considered as European wide (see above, point VI.). The parent companies, OOH and VIAG, mainly are or will be active on the market for mobile telephony in the United Kingdom and in Germany, respectively. At present, OOH has a market share of approximately 17% in the UK (calculated on the basis of the number of subscribers which amounted to 1.45 million in June 1998) and only a limited presence in other countries, such as Austria (non controlling interest in Connect Austria), Belgium and the Netherlands, through shareholdings in companies which are not yet active on the market. Furthermore, OOH is active in the UK, France and Germany in reselling airtime of other mobile networks. VIAG will be active, from October 1998 onwards, on the German mobile telephony market which will be entirely covered via a roaming agreement with Swisscom. Apart from that, VIAG also holds a non controlling participation in Connect Austria.

27.Only very few other European mobile operators use DCS 1800 technology for the time being. Although the combined market share of Orange and VIAG on a European-wide market does not exceed 25 %, the entry into the market of new DCS 1800 operators, which is currently taking place in most Member States, will exercise a downward pressure on this figure. The concentration would thus not lead to the creation or strenghtening of a dominant position on the EU market, as a result of which effective competition would be significantly impeded in the Common Market or a substantial part thereof. Even the conclusion of any future roaming agreements between Orange SA and its parent companies Orange and VIAG would not affect this conclusion.

B. Co-ordination of competitive behaviour

28. Pursuant to Article 2 (4) of the Merger Regulation, to the extent that the creation of a joint venture has as its object or effect the co-ordination of the competitive behaviour of undertakings that remain independent, such co-ordination shall be appraised in accordance with the criteria of Article 85 (1) and (3) of the EC Treaty. In order to establish a restriction of competition in the sense of Article 85 (1) of the EC Treaty, it is necessary that the co-ordination of the parent companies' competitive behaviour is likely and appreciable and that it results from the creation of the joint venture, be it as its object or its effect.

Definition of candidate markets

29. Candidate markets for co-ordination among parent companies are to be found where two or more parent companies retain to a significant extent activities in the same market as the joint venture or in a market which is downstream or upstream from that of the joint venture or in a neighbouring market closely related to this market. The assessment in this respect can be limited to the narrowest possible markets, i.e. national markets, if even on those markets, no co-ordination is taking place.

30. Since the Commission would not be competent to take any position on competition on the Swiss market, only closely related markets within the EU are to be looked at as possible candidate markets. Both OOH and VIAG being active, to a different extent, on the Austrian and on the German mobile telephony markets, these markets can be considered as candidate markets for co-ordination.

Likelihood of co-ordination

31. There are no indications which would allow the conclusion that the creation of Orange SA has the object of co-ordinating the competitive behaviour of Orange and VIAG on the market concerned, but the creation of Orange SA might have the effect of co-ordinating the competitive behaviour of Orange and VIAG.

32. In Austria, both OOH and VIAG are engaged on the mobile telephony market through their respective shareholdings in Connect Austria. However, this does not lead to a co-ordination among the parent companies which would be due to the creation of the joint venture in Switzerland. Connect Austria itself is not yet active on the market and the shareholding is prior to the creation of Orange SA. In Germany, OOH is only active on the mobile market through the resale of airtime (through its subsidiary Hutchison Telecommunications Germany) and VIAG is not yet active at all. Therefore no co-ordination is likely on that market either.

33. It follows that in the present case, there is no likelihood that the creation of the joint venture company would lead to a co-ordination of the competitive behaviour of the parent companies on the market of the joint venture or on other closely related markets.

VIII. ANCILLARY RESTRAINTS

34. The notifying parties have identified four ancillary restrictions which they claim are directly related and necessary to the implementation of the concentration.

35. Article VII of the Shareholders Agreement provides:

The founding shareholders are committed to provide technical and other services to the joint venture subject to fair commercial terms and conditions;

OOH covenants to procure that its affiliate Orange Personal Communications Services Ltd. will grant a trademark licence for the Orange brand to the joint venture at fair commercial terms;

The joint venture is allowed to enter into supply and other agreements with any of its shareholders. However, any shareholder shall have the right to call for full particulars of any contract with the shareholder or entities in which it has a controlling interest and for an audit of the company's records of performance of the contract.

36. Article XI of the Shareholders Agreement provides:

No shareholder shall without the prior written consent of the others during the term of the Agreement, either alone or jointly with any other person directly or indirectly engage in the business of or participate in a company offering telecommunications services in Switzerland in direct competition with those then offered or planned to be offered by the joint venture. This non-compete covenant does not however apply to roaming services for subscribers to networks outside of Switzerland and other services incidental to contracts between shareholders and third parties not resident in Switzerland or to non-controlling interests in shares in companies listed in any stock exchange.

37. The Commission considers that the first three clauses referred to above do not contain any restriction of competition. Any agreements which may be concluded pursuant to those clauses are however not part of the notification and are therefore not covered by this Decision.

38. To the extent the non-compete covenant has an impact on competition in Switzerland, it is outside the competence of the Commission and the Commission accordingly makes no further observations in that respect.

IX. CONCLUSION

39. In the light of the above, the proposed transaction does not raise serious doubts as to its compatibility with the common market.

40. The Commission therefore has decided not to oppose to the notified operation and to declare it compatible with the common market. This decision is adopted in application of Article 6 (1) (b) of Council Regulation (EEC) No. 4064-89.

(1) OJ L 395, 30.12.1989 p. 1; corrected version OJ L 257 of 21.9.1990, p. 13; as last amended by Regulation (EC) No 1310-97, OJ L 180, 9. 7. 1997, p. 1, corrigendum in OJ L 40, 13.2.1998, p. 17.