- Investors have been pressing Vodafone for some major M&A action
- Vodafone and Three UK have been linked for years
- Now Vodafone has broken cover and admitted merger talks are underway
- Regulators likely to be more open to such a deal than in the past
- Vodafone needs to get this one over the line, says another
It’s been one of the worst-kept secrets in telecom but now it’s out in the open – Vodafone UK and Three UK like the look of each other and fancy putting a ring on it (so to speak). What’s important now, though, is that such a proposal would have been halted at the altar by regulators in years past, but now there’s a chance that, if the two operators structure the deal, it could be given the green light.
After years of speculation, Vodafone this morning announced it is in discussions with Three UK’s parent, CK Hutchison, about a potential combination of the businesses that would result in a merged company owned 51% by Vodafone and 49% by CK Hutchison. No cash would change hands.
The news will give Nick Read, Vodafone Group’s CEO, some breathing space as he has been under pressure from investors to strengthen and simplify the operator’s portfolio.
The UK deal is all about scale, bringing together Britain’s third- and fourth-largest infrastructure-based mobile operators. Vodafone noted in its announcement to the London Stock Exchange: “As Ofcom has identified, some operators in the UK - Vodafone UK and Three UK - lack the necessary scale to earn their cost of capital. 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.”
The two “already consolidated players” are, of course, EE, which is part of the BT Group, and Virgin Media O2, which was formed in June 2021.
Vodafone UK has 17.2 million mobile customers (fewer than two years ago) and almost 1.1 million fixed broadband customers, while Three UK has 9.9 million mobile customers. If the two companies were combined today, their 27.1 million mobile customers would make it the market leader in terms of retail mobile connections and a much more robust rival to the market leaders.
At the end of June, Virgin Media O2 reported 24 million retail mobile connections (its official report claims 33 million, but 9 million of those are internet of things connections), as well as 5.6 million fixed broadband customers, while EE is believed to have about 20 million mobile customers and more than 9 million retail broadband customers (those are approximate numbers because BT no longer publishes its retail customer data).
But while a combined Vodafone/Three company would claim the mobile customer crown, those fixed broadband connections are important as the drive for all operators these days is for “converged” customers that take mobile and fixed broadband (preferably fibre) services (and anything else on top!) as part of the same contract, so it’s possible that Vodafone might feel the need to supplement any deal it strikes to merge with Three UK with a follow-up deal to bolster its fixed broadband position.
While such a merger would clearly help Vodafone and Three and cheer those who see this as a move that would strengthen the market and encourage investment, it will face strong opposition, not only from BT and Virgin Media O2 but also from those concerned that such a move would be detrimental to market competition and negatively impact customer options. Such concerns led to the regulatory rulings that stopped Three UK merging with O2 six years ago, but now there is a sense that, in order to maintain a strong set of service providers and enable viable market conditions, such a merger might be given the green light.
CCS Insight’s director of consumer and connectivity, Kester Mann, noted in emailed comments to TelecomTV that “there’s a sense now that regulator sentiment toward deals could finally be shifting. Many in the industry are pinning hopes on a more sympathetic stance after operators more than proved their worth in the pandemic. With telecom networks now considered a critical part of national infrastructure, could we start to see a greater focus on encouraging network investment and less on offering low prices for consumers? The sector will also have taken heart from a European court’s decision last year to uphold an appeal against the annulment of the Three and O2 deal. This could have encouraged Orange and MasMovil in Spain to announce their plans to merge a couple of months ago.”
Mann continued: “Many in the industry feel that authorities are now less wedded to having at least four mobile operators in each market. The Orange-MasMovil deal will test this hypothesis — if it is given the green light, it could open the floodgates for deals elsewhere.
“Intriguingly, UK regulator Ofcom recently clarified its position on mergers, saying it would review any deal on its individual merits, rather than the potential for reducing the number of competitors. This set tongues wagging about potential mergers; but as ever the devil was in the detail. Ofcom added that it sees no evidence that service quality or investment increases when markets get more concentrated.
“Still, although Ofcom has indicated it may be prepared to think differently, it’s the Competition and Markets Authority that would have the final say. With UK customers enjoying some of Europe’s most attractive mobile tariffs, it could prove a harder body to win over. Whichever way you look at it, Vodafone and Three would still face massive scrutiny. Should they announce a deal, I’m sure it would need some concessions to get over the line,” concluded Mann.
Industry analyst Paolo Pescatire, founder of PP Insight, agreed that “concessions will need to be made to get this over the line,” but that Vodafone will “need to move quickly to avoid losing further ground in the UK, as it has done in other European markets.”
Investors are clearly hopeful, as Vodafone’s share price is up by 2.8% to 103.9 pence on the London Stock Exchange.
- Ray Le Maistre, Editorial Director, TelecomTV
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