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By Foo Yun Chee and Pamela Barbaglia
BRUSSELS/LONDON (Reuters) - Hutchison Whampoa is set to face an extensive EU investigation over its bid for Telefonica's British unit and is prepared to sell network capacity and frequencies to head off antitrust concerns, three sources said on Friday.
Hutchison's planned 10.3-billion-pound ($16 billion) acquisition of Telefonica's O2 business would make it the top mobile operator in Britain. But it comes as the European Commission has signaled a tougher line on telecoms mergers, including forcing companies to divest infrastructure network.
The stakes are high for Hutchison, owned by Asia's richest man, Li Ka-shing. Failure to get EU approval for the deal could put a brake on its expansion and long-term prospects in Europe, rating agency Moody's wrote in a note last week.
The EU competition authority had previously set an Oct. 16 deadline for its preliminary review of the deal.
It is now expected to follow that up with an extensive investigation because of the case's complexity, according to the sources familiar with the matter. A full-scale or so-called phase-two investigation lasts around five months.
Hutchison may have to sell parts of the combined entity's network capacity and frequencies - or spectrum - to get the green light, and is prepared to do so, the sources said.
Commission spokesman Ricardo Cardoso and Telefonica (MADRID:TEF) declined to comment. A Hutchison Whampoa spokesman could not be immediately reached for comment outside office hours.
TeliaSonera and Telenor said last week that they had abandoned their planned merger in Denmark because of stiff opposition from European regulators, raising concerns that larger mobile telecom deals pending in Britain and Italy might also run into trouble.
It was the first time that regulators had scuppered such a deal since European mobile network operators embarked on an acquisition spree in early 2013. It caused investors to worry that EU Competition Commissioner Margrethe Vestager was taking a harder line than predecessor Joaquin Almunia.
The merged company formed by the Hutchison-Telefonica deal would own half of Britain's most attractive mobile spectrum in the so-called low-frequency bands, which allow operators to cover long distances more cost-effectively, according to Moody's. It would also own 37 percent of the spectrum in high-frequency bands above 1800 megahertz.
One complication is the fact that Hutchison's existing British business, Three, shares a 3G mobile network with No.1 player EE, while Telefonica shares some mobile towers with Vodafone (LONDON:VOD). That means it might be difficult to sell off parts of the networks to address regulatory concerns, analysts have said.