The merger of O2 and Three has been thrown into major doubt after the competition regulator said the deal would cause "long-term damage" for consumers in the UK.
The Competition and Markets Authority (CMA) recommended to the European Commission that it should either block the deal completely, or impose strict regulations on the joint mobile network. The regulator warned that the deal would leave just three mobile networks available in the UK.
Three, which is owned by Asia's richest person Li Ka-shing, announced last year that it had agreed a deal worth more than £10 billion to buy O2 from Telefonica. If approved, it will create the UK's largest mobile network, with just EE and Vodafone to compete against.
The European Commission has until 19 May to make a decision on the merger. It has been in talks with Three over the past few weeks and requested "remedies" to make a deal easier to approve. But the CMA said they "fall well short" of what is required to ensure good competition for consumers. It even urged the European Commission to force a merged company to sell-off most of O2 of Three's mobile network.
In a letter to the European Commision, Alex Chisholm, chief executive of the CMA, said: "Absent such structural remedies, the only option available to the Commission is prohibition."
This setback doesn't mean the deal is dead in the water. There is a precedent of the European Commission approving deals that reduce the number of mobile networks from four to three; it has already done so in Austria and Germany.