Will the FTC’s final bid to stop the Digicel-Claro merger be successful?

Last year March, Digicel announced it had purchased Claro, the third mobile operator in Jamaica. The transaction was completed in November, but the competition regulator has filed a lawsuit to stop the merger.

In the last days of 2011, the Far Trading Commission (FTC) announced that it was seeking an injunction in the Jamaica High Court to prevent the merger of Digicel Jamaica Limited and Claro Jamaica Limited. The suit was filed on the grounds that, among other things, the merger would lessen competition in the island’s mobile/cellular market and is in breach of the Fair Competition Act 1993 as amended.

In a press release issued by Digicel yesterday, the company refuted claims made by the FTC. It is of the view that the merger will “… spur innovation and investment and benefit consumers right across Jamaica…“ Initiatives that Digicel plans to implement include:

  • expanded island-wide 4G mobile service, based on HSPA+, and over 80% of the population coverage
  • effective 4 January for prepaid customers and 12 January for post paid customers, a lower cross-network calling rates by JMD 3.50 (USD 0.04) per minute peak periods and JMD 2.00 (USD 0.02) per minute in off-peak periods, and
  • free wireless access to primary and secondary schools and post offices in remote locations.

Mergers and acquisitions in telecoms in the Caribbean

Although Jamaica is grappling with the consequences of the sale and merger of Claro’s local operations with Digicel’s, it is not a novel event in telecoms sectors across the region. An earlier example occurred in 2004 when Cingular Wireless acquired AT&T Wireless Services’ entire operation, which included the parent company in the United States, along with subsidiaries across the Caribbean and Latin America. However, by 2005, Digicel had purchased Cingular Wireless’ Caribbean operations. The company not only used the sale to expand into new markets, such as Bermuda, Antigua and Barbuda and Dominica, but also merged competing businesses with its own, for example, in Barbados, Cayman Islands, Grenada and St. Lucia.

Furthermore, it is important to remember that mergers and acquisitions are regular occurrences in business. Companies are bought and sold for numerous reasons, which in a free market economy ought to be respected. While certain safeguards might be necessary for such transactions, it then is imperative that they are properly established so that industry players can factor them into their business dealings.

Will competition be lessened?

The merger of Digicel’s and Claro’s operation effectively decreases the number of players in Jamaica’s mobile/cellular market from three to two. In its court filings, the FTC estimated customers’ benefits of competition between Claro, Digicel and LIME exceeded JMD 16 billion (USD 185 million) during the 4-year period Claro operated in Jamaica (Source: Jamaica Observer). However, such statements are not enough.

Due to the considerable implications to Digicel if the merger is barred – at this the eleventh hour – the FTC should be able to authoritatively demonstrate the myriad ways competition would be lessened, and the harm to the sector, of which Digicel is a part, if the merger were completed. (See our post, Is the sale of Claro to Digicel good for competition in Jamaica? for some of issues that should be considered.)

Damage control considerations

From all reports, a date for the hearing of the FTC’s case has not yet be set, and neither does it appear that a stay was granted in favour of the FTC to halt the merger in the interim. Hence the merger continues.

Under those circumstances it is hoped that the FTC, along with its sister regulatory bodies (e.g. the Office of Utility Regulation and the Spectrum Management Authority), are considering strategies that still encourage competition and re-stabilise the sector. A few of the topics that could be explored include:

1. Radio spectrum and numbers resources. Thanks to the merger, Digicel will be acquiring the frequencies and number assigned to Claro. Essentially, it would have double the resources normally assigned to one operator, which means that Jamaica might not be in a position to attract a new mobile/cellular operator to its market.

2. Number portability.  Number portability, the ability of subscribers to retain their telephone numbers when changing service providers, has not been implemented in Jamaica. However, should Jamaica implement number portability, competition could be enhanced as companies will experience more fully effect of customer choice, since dissatisfied customers can retain their numbers when switching to another network.

3. Job redundancy. On a separate note, in yesterday’s press release, Digicel indicated that Claro employees had been offered “Enhanced Separation Packages”. It is understood that layoffs will commence by the end of January and around 250 people will be affected. Although the packages might be generous, and some employees will be offered short-term contracts with Digicel, admittedly, this is a bad time to be unemployed in Jamaica. The country is still recovering from the global recession, and job creation has been a critical political issues, especially in the national elections held on 29 December 2011.

Parting notes…

In light of the FTC’s lawsuit, it appears that Jamaica wishes to retain a three player mobile market at (almost) all costs. From all accounts, and as a new entrant into a capital-intensive market, Claro’s operations were net yet profitable in Jamaica. Just prior to the sale, the company was still building out its network, which would have been necessary to increase its customer base and to realise long-term sustainability and profitability.

More importantly, it may be unreasonable for the FTC to expect a provider, Digicel, to run two separate and competing entities in the same market. Such an approach could be seen as unduly compromising the interests of a player in a commercial (but regulated) environment. Moreover, this stance could send the wrong signal to potential investors and have deleterious consequences not only on Jamaica’s telecom industry, but also on the wider business sector.