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‘A marriage of convenience’: Vodafone in talks to merge with Three

The combined company would control 46% of the UK mobile spectrum, and a deal would make sense for both parties.

By Ryan Morrison

Vodafone is in talks to merge with CK Hutchison’s Three network in the UK, in a move that it says would allow for a faster roll-out of 5G. Dubbed a “marriage of convenience” by one analyst, the move makes sense as both companies serve different sectors of the market.

Vodafone and Three are in ‘advanced talks’ over a merger that could complete this year. (Photo by viewimage/William Barton/Shutterstock)

Vodafone would own 51% of the new combined UK company, and Hutchison would control 49%, funding its side of the deal through a leveraged contribution, not cash. It isn’t clear what form or name the new business would take.

The pair hope that a deal could be struck by the end of the year, but analysts say it is likely to be called in for a market impact review by the Competitions and Market Authority (CMA), as the combined group will have 27 million customers, making it larger than BT’s EE and Virgin Media O2.

If the merger goes ahead, it will leave the UK with three major spectrum-owning public mobile operators. Paolo Pescatore telecoms analyst at PP Foresight told Tech Monitor: “As things stand it’s not a slam dunk [that the deal will happen] but there’s interest from all sides to get it over the line.”

Vodafone has been exploring mergers or partnerships with rivals in multiple European markets, with CEO Nick Read confirming in February the aim was to improve returns due to the high costs of investing in networks.

Hong Kong-based CK Hutchison has been exploring options for the sale of Three in the UK after concluding that it would require too much capital investment to scale up to a level necessary to meet the demands of its nine million customers.

Vodafone Three deal could turbocharge the spread of 5G

A deal with Vodafone would allow Three to accelerate the roll-out of 5G and super fast broadband throughout the UK. Pescatore says. “Ultimately the number of mobile players will reduce, limiting consumer choice,” he explains. “Scale is key to help lower costs and improve margins. Convergence still remains the Achilles heel if this does get over the line.”

The CMA is almost certain to launch a full merger inquiry that could lead to it either being blocked or requiring asset sales – which could include divesting of spectrum bands held by both companies.

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Vodafone and Three would control 46% of all UK mobile spectrum if they were to merge and have 27 million customer connections compared to 24 million for Virgin Media O2 and 20 million for BT Group.

Pescatore says there are few big strategic moves left in the UK, but with the push for convergence due to the high cost of roll out, the likes of Three, Vodafone and TalkTalk are in a difficult position. “While Vodafone is addressing this through wholesale agreements in the fixed-line market, it is unclear whether a merger with Three UK is the silver bullet,” he says.

He adds a deal makes more sense for Three than Vodafone, as it currently has a mobile-only position, whereas others are offering multi-service solutions including fixed-line broadband and television.

“It seems apparent that these two players are seeking, in market consolidation, to be a mobile champion,” he adds. “In mobile there could be some scope to compete head-on with O2 and EE, especially in 5G.”

UK mobile market: four into three does go

The primary aim of any merger would be scale. Vodafone is losing ground in the UK as it has done across Europe so “a marriage of convenience makes sense given the rapidly converged landscape”, says Pescatore.

John Strand, telco analyst from Strand Consulting told Tech Monitor a merger on this scale was inevitable as the UK mobile market isn’t large enough for four or more major companies.

“There are many good reasons that a merger between Vodafone and Three make sense,” he says. “Despite some consolidation in the UK (Orange/T-Mobile, EE and BT as well as O2 and VirginMedia), there is still a need to consolidate the market.”

The challenge will be in how regulators decide to approach the merger and whether they accept that three networks provide enough competition, he says. “Our research shows that it is not the number of operators but the technological development that creates competition,” Strand argues.

He adds: “I see lots of good reasons to merge the two companies, right now they both compete against two large operators that have both fixed and mobile solutions. In practice, they have some challenges that the other two competitors do not have.”

He says Ofcom have also identified that UK operators have a serious return on capital issue, which hits the non-consolidated players – such as Vodafone and Three – harder than those who have come together to share the load across more customers, and believes regulations in the UK and EU markets – not found in other parts of the world – hinder smaller providers disproportionately.

Ernest Doku, telecoms expert at Uswitch.com, said the merger would present a huge shake-up to the mobile industry but would be beneficial to the operators as it would allow them to share infrastructure and expand 5G coverage faster.

“With the scale and costs involved in the rollout of 5G, a merger makes a lot of sense. Consumers have told us that they expected more from this technology than they’ve experienced to date, so any move that will expand and improve coverage is to be welcomed,” Doku says,

“However, it remains to be seen whether a merger would maintain competition and deliver on the promise of 5G.”

Read more: 5G technology overshadowed by spectrum wrangling

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