Mobile Giant Vodafone Confirms Merger Talks with Three UK

After months of speculation, mobile network operator Vodafone UK has today confirmed that they are officially in “discussions” with Three UK’s parent (CK Hutchison Holdings) about the possibility of a merger. Such a deal would give the combined business the “necessary scale” to boost their 5G rollout and “expand” rural broadband connectivity.

According to today’s the market statement from Vodafone, the envisaged transaction would involve both companies combining their UK businesses, with Vodafone owning 51% and their partner CK Hutchison owning 49% of the combined business. The relative ownership would be achieved “through a differential leverage contribution at closing“, and no cash consideration being paid.

The merged business would, claims Vodafone, challenge the two already consolidated players (i.e. BT + EE and Virgin Media + O2) for all UK customers and bring “benefits through competitively priced access to a third reliable, high quality, and secure 5G network throughout the UK“.

However, the operator warned “there can be no certainty” that any transaction between the two companies will ultimately be agreed, although these talks have been going on behind closed doors for several months now (here) and today’s announcement suggests the two sides are serious about trying to establish a workable agreement.

Vodafone’s Full Market Announcement

Vodafone Group Plc (“Vodafone”) notes the recent press speculation in relation to Vodafone UK and Three UK.

Vodafone confirms that it is in discussions with CK Hutchison Holdings Limited (“CK Hutchison”) in relation to a possible combination of Vodafone UK and Three UK.

The envisaged transaction would involve both companies combining their UK businesses, with Vodafone owning 51% and our partner CK Hutchison owning 49% of the combined business.

The relative ownership would be achieved through a differential leverage contribution at closing, and no cash consideration will be paid.

The UK Government rightly sees 5G as transformational for the economy and society and critical to the UK becoming more competitive in an increasingly digital world.

The conditions to ensure thriving competition in the market need to be nurtured, otherwise the UK is at risk of losing the opportunity to be a 5G leader. As Ofcom has identified, some operators in the UK – Vodafone UK and Three UK – lack the necessary scale to earn their cost of capital (1).

By combining our businesses, Vodafone UK and Three UK will gain the necessary scale to be able to accelerate the rollout of full 5G in the UK and expand broadband connectivity to rural communities and small businesses.

The merged business would challenge the two already consolidated players for all UK customers and bring benefits through competitively priced access to a third reliable, high quality, and secure 5G network throughout the UK.

There can be no certainty that any transaction between the two companies will ultimately be agreed.

If required, a further announcement will be made when appropriate.

This announcement contains inside information for the purposes of Article 7 of the Market Abuse Regulation (EU) No 596/2014 as it forms part of domestic UK law as defined in the Market Abuse (Amendment) (EU Exit) Regulations (SI 2019/310).

(1) Ofcom’s Discussion Paper (February 2022) described Vodafone UK and Three UK as sub-scale operators

In the past, Ofcom has tended to object to big mobile-only mergers, which is partly because they wanted to protect consumer and wholesale (MVNO) competition in the market. But a 2020 ruling by the European Court of Justice (here) made it harder to adopt that position, although the regulator is no longer beholden to such rulings post-Brexit, but is still believed to have softened their stance (we’ll find out soon enough).

However, the benefits of such a merger aren’t quite as clear-cut as they were in the case of BT and EE or O2 and Virgin Media, which predominantly reflected a tie-up between fixed line businesses on one side, and mobile businesses on the other. By comparison, Three UK doesn’t have a fixed line business and Vodafone has some of its own business fibre, but their consumer base largely reflects partnerships with Openreach and CityFibre.

In short, the main benefit from such a deal appears to be the extra support they’d get for their 5G deployments, which would not only boost the pace of their UK rollout but also help to extend coverage deeper into rural communities. Lest we forget the need to look ahead toward 6G. All of this stuff is getting very expensive for operators, particularly as the networks need to be increasingly dense.

On the other hand, such a deal would not be without its challenges, and the market regulators may well require concessions (e.g. how much spectrum would the merged company be allowed to retain? It may well need to redistribute some of that to other operators to balance the competitive impacts). The markets’ many virtual operators (MVNO) may also have some big concerns about the loss of a competitive supplier.

The fact that Vodafone has a network sharing agreement with O2 (VMO2), while Three UK has a similar agreement with EE (BT), is another area that will require careful unpicking to avoid upset. One other issue is the fact that Three UK has tended to be more of a low-cost brand, while Vodafone tends to be a bit more premium in its pricing. Balancing that and keeping customers happy in the process will be tricky.

The other big question mark will be over whether consumer prices will be more likely to rise (over the longer-term) in a market with three MNOs versus one with four, and how much that matters. Ofcom and the Competition and Markets Authority (CMA) will have a difficult task in assessing all this, but it does seem like there are fewer roadblocks to such a deal today than a few years ago.

Finally, it’s possible that the Government may also raise security concerns, given that Three UK’s parent – CK Hutchison – is a Hong Kong firm and these days that tends to be associated with direct influence from China. The UK government is currently trying to avoid scenarios in which countries like China secure a key position in critical national infrastructure. But CKH may well point out that it already controls some UK ports and power networks.