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The U.K. competition regulator has raised a major red flag over Nexfibre's $2.7B Deal, provisionally finding that the proposed acquisition of Substantial Group could weaken competition across the country's wholesale broadband market.

The Competition and Markets Authority said Friday that its detailed investigation found the $2.7 billion transaction could substantially reduce competition in the wholesale supply of fixed broadband services if completed.

“We have provisionally found that the transaction ... may be expected to result in a substantial lessening of competition in the wholesale supply of fixed broadband services,” the CMA said.

The finding is not final. Interested parties have until Oct. 23 to submit comments before the regulator reaches its final decision.

$2.7 Billion Deal Enters Critical Regulatory Phase

Nexfibre is a joint venture backed by private equity firm InfraVia Capital Partners and European telecommunications companies Telefónica and Liberty Global.

The venture announced its agreement to acquire Substantial Group in February, putting a major independent fiber operator in its sights.

Substantial Group is the U.K.'s second-largest alternative fiber provider. Unlike traditional broadband companies that rely on infrastructure owned by major operators such as British Telecom's Openreach, alternative fiber companies build and operate their own full-fiber networks.

Its portfolio includes Netomnia, Brsk and YouFibre.

The proposed transaction could therefore redraw the competitive map of Britain's broadband infrastructure, bringing another major independent network under the control of a venture connected to two of the country's established telecommunications players.

Virgin Media O2 Also Sits at the Center

The deal carries another important connection. Liberty Global and Telefónica jointly own Virgin Media O2, and the transaction provides for the eventual sale of Substantial Group's retail businesses to Virgin Media O2 for more than $202 million.

That relationship has intensified scrutiny of the acquisition as regulators examine whether the combination could narrow choices for companies purchasing wholesale broadband capacity.

CMA Escalates Investigation

The competition regulator first requested views on the proposed acquisition in April before formally launching a merger investigation in June.

On July 1, at the request of the companies involved in the transaction, the CMA moved the review into its more intensive Phase 2 investigation.

That deeper examination brought views from several major players in Britain's broadband sector.

BT Group, CityFibre, Hyperoptic and Grain Connect all provided submissions, while broadband provider Sky also offered its views during the review.

The CMA's latest announcement means the deal remains under examination rather than receiving an immediate green light.

Competitors Warn of a Two-Network Market

CityFibre has emerged as a particularly vocal opponent of the transaction.

The company argued that acquiring Netomnia through the Substantial Group deal would reduce the number of major fixed broadband networks in the U.K. from three to two.

Under that scenario, CityFibre said, the principal networks would effectively become Openreach and the Virgin Media O2/Nexfibre combination, after Netomnia is absorbed into the venture.

CityFibre Raises Duopoly Concerns

CityFibre told the CMA that removing Netomnia as an independent competitor could significantly weaken competition in both wholesale and retail broadband markets.

It argued that the acquisition would strengthen what it described as an Openreach and Virgin Media O2 duopoly, limiting the choices available to internet service providers.

CityFibre also warned that the transaction could undermine regulatory efforts to establish a third nationwide broadband network.

The concerns put the proposed acquisition at the center of a broader question facing the U.K. telecom industry: how far consolidation can go before the market loses the competitive pressure regulators have sought to build through alternative fiber networks.

Deal Faces More Scrutiny Before Final Decision

The CMA's provisional finding does not necessarily end Nexfibre's $2.7B Deal, but it places the transaction at a crucial crossroads.

The regulator will consider responses to its findings before determining whether the acquisition should proceed and, if so, under what conditions.

Substantial Group was advised by Freeths LLP and Simpson Thacher & Bartlett LLP.

Nexfibre's joint venture was advised by Linklaters LLP.

The latest development leaves the $2.7 billion acquisition facing another stretch of regulatory scrutiny, with the future structure of one of Europe's most competitive broadband markets hanging in the balance.