Vodafone confirms Three UK merger talks

Revealing a move that analysts are speculating could transform the UK’s 5G and communications industry by providing real competition to BT/EE and the recently merged O2/Virgin mobile, operator Vodafone has confirmed that it is attempting to merge with rival mobile provider Three UK.

The two companies have made no secret of their interest to consolidate. In a statement, Vodafone confirmed that it was in discussions with Three UK parent company CK Hutchison Holdings Limited in relation to a possible combination of businesses. The envisaged transaction would involve both companies combining their UK businesses, with Vodafone owning 51%, and CK Hutchison owning 49% of the combined business.

Vodafone said: “By combining our businesses, Vodafone UK and Three UK will gain the necessary scale to be able to accelerate the roll-out 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.”

Vodafone added that the relative ownership would be achieved through a “differential leverage” contribution at closing of the deal with no cash consideration paid.

Any prospective deal would be the subject of stringent regulatory examination by the UK’s competition authorities and UK communications regulator Ofcom.

A statement by the regulator in February 2022 first sparked expectation of a potential merger between the operators, launching a discussion document in which it sets out initial thinking on future demand for mobile services and how mobile networks may need to evolve to meet that demand.

Warning that mobile networks would need to evolve to meet future demand and deliver the quality of experience needed by consumers and businesses, the discussion paper set out the future approach to mobile markets, clarifying the operator’s position on mobile consolidation, remarking that its stance on a potential merger would be informed by the specific circumstances rather than just the number of competitors.

Responding to Ofcom’s plans at the time, Three UK said consolidation in the industry could change how the UK is without the quality of mobile infrastructure it deserves, with investment spread too thinly across too many players, meaning that networks were below par by international standards. Three pointed out that seven of the top 10 European countries in Connect 2020 testing of network quality were three-player markets.

“The leading motivation to join forces is scale. In telecommunications, the most successful companies tend to be the largest; bulking up would offer many synergies and cost-saving opportunities. Under the status quo, it’s hard to see either operator growing enough organically to get close to challenging BT and Virgin Media O2 for size in the UK,” said Kester Mann, director of consumer and connectivity at analyst firm CCS Insight.

“Not so long ago, a tie-up between Vodafone and Three would have felt like an unnatural pairing. But in recent times, Vodafone has taken on more of a challenger role in its home market, so the two operators’ strategies may no longer be too far apart.

“Should any deal materialise, regulation would be a major hurdle. It would be up to the competition authorities to decide whether reducing the number of players is for the overall good of the market. Advocates will argue that it encourages investment; dissenters will claim that it’s a reason to push up prices.”