The deal would have seen Telefonica’s O2 merge with Hutchison's UK network Three in a deal valued at £10.25bn.
The tie up would have reduced the mobile operators in the UK to three, leaving just Vodafone and BT’s EE to challenge the merged O2-Three.
Commissioner Margrethe Vestager, in charge of competition policy, said:
We want the mobile telecoms sector to be competitive, so that consumers can enjoy innovative mobile services at fair prices and high network quality. The goal of EU merger control is to ensure that tie-ups do not weaken competition at the expense of consumers and businesses.
Allowing Hutchison to takeover O2 at the terms they proposed would have been bad for UK consumers and bad for the UK mobile sector. We had strong concerns that consumers would have had less choice finding a mobile package that suits their needs and paid more than without the deal.
It would also have hampered innovation and the development of network infrastructure in the UK, which is a serious concern especially for fast moving markets. The remedies offered by Hutchison were not sufficient to prevent this.
The ruling is the first time the Commission has moved to block a telecoms merger in a major European market.
Telefonica has said it is open to floating the company as well as talking to other buyers. The Spanish telecoms giant is keen to offload the mobile network to reduce its high levels of debt and prop up its annual dividend.
Yesterday it emerged that Liberty Global, the cable company that owns Virgin Media, has signalled interest in buying O2.
Mike Fries, Liberty Global’s chief executive, told investors: “We look at all options in the marketplace and it would be strange if we didn’t evaluate that option.”
Hutchison said it is considering mounting a legal challenge to the ruling:
We strongly believe that the merger would have brought major benefits to the UK, not only by unlocking £10bn of private sector investment in the UK’s digital infrastructure but also by addressing the country’s coverage issues.
CKHH will now focus on working with the Commission towards clearance of our proposed merger with Wind and 3 Italia and continue to pursue strategies to bring value to CK Hutchison Group.
Hutchison’s joint venture with VimpelCom in Italy is currently the subject of a separate commission investigation and today's ruling casts significant doubt over whether the deal will be approved.
The head of the UK's Competition and Markets Authority in April wrote to the European Commission, warning that the merger would create "a significant impediment to effective competition" in the British telecoms market.
A spokesperson at the UK's communication watchdog Ofcom, which has also argued against the plans, said: “We believe this is the right outcome for mobile customers, who have always been our priority.
Three and O2 are important and effective competitors in the UK, helping to deliver innovation, investment and competitive prices over many years.
Competition must be sustainable, and regulation should support it. We will aim to do so through tools such as market reviews or auctions of mobile airwaves."
The ruling, although widely expected, casts doubt over the two companies future in the UK.
"It also casts serious doubt over the future structure of a European telecoms sector that had banked on the tie-up paving the way to further consolidation," said Kester Mann, principal operators analyst at CCS Insight.
The most likely eventual outcome for O2 is sale to private equity, however Liberty Global, which owns Virgin Media, could consider a bid. Sale or partial-sale to a deep-pocketed operator from outside the UK such as Softbank or America Movil is also plausible.
For the time being however, O2’s parent Telefonica may elect to hold on to an asset that in recent years has impressively out-performed rivals despite its uncertain future.
Three’s future now looks vulnerable as a sub-scale mobile operator in a market rapidly transitioning to multiplay.
The EC has previously waved through similar deals in Austria, Ireland and Germany that have reduced the numbers of mobile operators from four to three.