Vodafone, Three merge UK businesses

In what is being described as the biggest shake-up in the UK mobile market for over a decade, leading operators Three UK and Vodafone have confirmed the long-held expectation that they will combine businesses to compete more effectively in the UK comms market.

Parents Vodafone Group and CK Hutchison Group Telecom (CKHGT) have entered into binding agreements in relation to a combination of their UK telecoms assets in which Vodafone will own 51% of the combined entity, under the working title of MergeCo, and CKHGT 49%.

Vodafone and CKHGT have call and put options, respectively, which if exercised would result in Vodafone acquiring CKHGT’s 49% shareholding. Vodafone UK CEO Ahmed Essam will become MergeCo CEO, and current Three UK chief financial officer (CFO) Darren Purkis will take the role of MergeCo CFO.

The merger will create a third large-scale UK operator that Vodafone and Three say will level the competitive playing field, increasing competition to the UK’s two leading converged operators, and will also provide more choice in wholesale partners for the UK’s already-competitive mobile virtual network operator (MVNOs).

The news comes just weeks after Vodafone Group chief executive Margherita Della Valle slammed the telco for a fiscal year that was not good enough, and which will lead to 11,000 job losses in Europe. She described the merger of Vodafone UK and Three UK as being great for customers, great for the country and great for competition.

“It’s transformative as it will create a best-in-class – indeed best-in-Europe – 5G network, offering customers a superior experience,” said Della Valle. “As a country, the UK will benefit from the creation of a sustainable, strongly competitive third scaled operator – with a clear £11bn network investment plan – driving growth, employment and innovation. For Vodafone, this transaction is a game changer in our home market. This is a vote of confidence in the UK and its ambitions to be a centre for future technology.”

Canning Fok, group co-managing director of CK Hutchison, said: “Three UK and Vodafone UK currently lack the necessary scale on their own to earn their cost of capital. This has long been a challenge for Three UK’s ability to invest and compete. Together, we will have the scale needed to deliver a best-in-class 5G network for the UK, transforming mobile services for our customers and opening up new opportunities for businesses across the length and breadth of the UK.”

At the time of publishing his company’s recently announced 2022 fiscal results, Three UK chief executive Robert Finnegan warned that the company was at an inflection point. He noted that its returns continued to be below its cost of capital, and EBITDA minus capex remained negative.

Looking to the future, he added that high levels of investment would still be needed to deliver the networks the UK requires, but warned that levels of capex spread across the current set of four mobile players was unsustainable. Finnegan stressed that structural change is needed in the comms industry through consolidation.

Just over a year ago, speaking after UK regulator Ofcom launched a discussion document to set out thinking on future demand for mobile services and how mobile networks may need to evolve to meet that demand, Finnegan noted that moving from four to three mobile players in the UK would mean better, smarter investment in the networks, which would, in turn, improve the quality and scale of connectivity in Britain and unleash more competition.

With their venture, expected to close before the end of 2024 subject to regulatory and shareholder approvals, the companies assure that from day one, Vodafone UK and Three UK will enjoy a better network experience with greater coverage and reliability at no extra cost, including through certain flexible, contract-free offers with no annual price increases, and social tariffs. The combined business will offer fixed wireless access (mobile home broadband) to 82% of households by 2030, complementing MergeCo’s access to what they say will be the UK’s biggest full-fibre footprint.

The combined business will invest £11bn in the UK over 10 years to create what is claimed to be one of Europe’s most advanced standalone 5G networks, in full support of UK government targets. MergeCo will also reach more than 99% of the UK population with a 5G standalone network that, claim the two parents, will deliver to customers up to a six-fold increase in average data speeds by 2034.

This will unlock significant value for CK Hutchison and its shareholders, realise material synergies, reduce net financial indebtedness and further strengthen its financial profile, said Ahmed Essam, Vodafone UK chief executive. “The combination of Vodafone UK and Three UK will bring more choice and better value to customers nationwide,” he added. “With scale to invest, we will create a best-in-class 5G network, supporting the government’s 5G ambitions, drive digital transformation and create jobs.

“Through converged offers, we will really challenge the two largest operators and, of course, we will continue to support the most vulnerable in society with our social tariffs and our commitment to help six million people cross the digital divide by 2025.”