Vodafone has agreed to sell a portion of its spectrum to Virgin Media O2 if the former’s proposed merger with Three proceeds. The latter agreement would create the country’s largest telecoms provider – a prospect that led the UK’s Competition and Markets Authority in March to launch a Phase 2 investigation into the deal’s potential to inhibit competition in the sector. In a statement published earlier today, Virgin Media O2 chief executive Lutz Schuler said that the new deal answers many of the concerns his firm has expressed about the proposed merger.
“We are extending and bolstering elements of our existing network sharing agreement while also ensuring there is a robust, balanced and functional structure in place for the long-term should Vodafone and Three’s proposed merger gain consent,” said Schuler. “We believe that this new agreement addresses the issues we have voiced and the CMA outlined in its initial decision, and will now continue our engagement with the regulator in this spirit.”
Vodafone and Three merger would create largest UK telecoms provider
Vodafone and Three initially agreed to merge their UK operations last year. That deal, which would create a mobile network encompassing some 27 million customers, has remained in stasis as it awaits regulators’ approval. Two serious objections have since emerged: one surrounding the ability of the new company to securely oversee sensitive public contracts, given the ownership of Three by Hong Kong-based holding company CK Hutchinson, and the general competition implications of such a large firm emerging within the UK’s relatively moribund 5G market.
Evidence that these objections were not impossible to overcome emerged in May when the Cabinet Office said that the deal could proceed provided that the new company create a “National Security Committee” to oversee any sensitive public contracts. Regular updates on how the work is apportioned and managed would also have to be made to the UK government.
Competition concerns from BT and others
Whether Vodafone’s new spectrum deal with Virgin Media O2 will be enough to salve broader competition concerns over the proposed merger held by the CMA and other regulators is harder to determine. If the deal were to proceed, Vodafone-Three would occupy an estimated 46% of the total sub-6GHz spectrum used to provide 4G and 5G services and 59% of the 3.5GHz spectrum. Virgin Media O2 and rival BT currently occupy just over 20% each of the remaining latter spectrum. Any spectrum deal between Vodafone and the former, therefore, would see BT lose out.
“While BT’s current 32% of [sub-6GHz] spectrum won’t change and is reasonable in a three-player market, they might argue that they are short of lower-band spectrum (important for coverage) and 5G spectrum (important for capacity),” wrote the head of telecoms for Enders Analysis, Karen Egan, in a LinkedIn post.
In its response to the CMA’s Issues Statement published at the outset of its Phase 2 investigation into the merger, BT also complained that the deal would inhibit competition in the UK telecoms market, thanks in large part to the new company’s ability to access BT’s own investment plans via its participation in the Mobile Broadband Network Limited scheme. For their part, Vodafone and Three have consistently argued to the contrary, stating that the merger and the spectrum agreement will likely boost investment across the marketplace.
“The proposed merger, together with this agreement, will boost competition by establishing a strong third player in the UK mobile market,” said Ahmed Essam, Vodafone’s chief executive for European markets. Moreover, he added, it “will improve the balance of spectrum holdings, levelling the playing field between the UK’s mobile operators.”
