Orange SA’s $19 billion bid to combine its Spanish operations with Masmovil Ibercom SA is under threat from European Union merger watchdogs unless the firms fix a list of competition concerns set to be issued by regulators.

The European Commission is poised to issue a so-called statement of objections to Orange and Masmovil cataloging potential reasons to veto the tie up between Spain’s second and fourth largest mobile operators, according to people familiar with the matter who asked not to be named because the process isn’t public.

The filing, typical in complex mergers, will also flag possible solutions. In telecom deals, these would typically include the sale of assets or access remedies to make the new network interoperable with rivals.

The EU’s mergers watchdog opened an in-depth probe in April, warning that the joint venture could reduce the number of network operators in Spain and that the pair would have the incentive to restrict access of virtual operators to wholesale mobile network and wholesale fixed network access services.

The commission, Orange and Masmovil declined to comment. The commission currently has a deadline of Sept. 4 to come to a final decision, though that time-frame could slip.

In March, Spain’s competition authority filed a request to the EU to examine the deal itself, but the commission seldom allows national regulators to vet large telecoms deals that occur in their own markets.

The EU has previously chilled deal-making in the telecoms industry after it vetoed CK Hutchison Holdings Ltd.’s attempt to merge its UK company Three with Telefonica SA’s O2 in 2016, a deal that has been challenged to the EU courts with a ruling slated from the bloc’s top court on July 13.

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While getting a statement of objections signals the EU has serious concerns with a transaction, most merging companies avoid a veto by addressing competition issues. Companies also have the right to challenge the preliminary findings of regulators in writing or at a hearing.

Race to the Bottom

Spain is one of Europe’s most competitive telecom markets, with an abundance of low-cost players driving a race to the bottom on price. Under Spanish law, large operators have to share their networks at regulated prices, making it easy for newcomers to carve out a space in the low-end of the market.

As a result, big players such as Telefonica SA or Orange, have seen a steep decline in their revenues while new entrants have consistently gained market share in recent years. Masmovil, which collected remedies off a previous deal Orange did in 2015, grew 17% in 2022 while Romanian discount operator Digi, which uses Telefonica’s network, grew 38% in the same period.

Meanwhile, Spain’s economy ministry last week relaxed the restrictions that limit the amount of spectrum each mobile operator is allowed to hold, making it more difficult for a fourth strong player to emerge.

--With assistance from Clara Hernanz Lizarraga.