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June 14, 2023

Vodafone and Three agree UK merger, but will regulator block the deal?

The long-trailed merger is finally happening, and could see the UK's largest mobile network created.

By Matthew Gooding

Vodafone and Three have agreed a long-trailed merger which will create the UK’s largest mobile network with 27 million customers. But now the two companies must wait and see if the deal gets the blessing of the UK’s competition regulator, which may raise concerns about the new business taking too large a share of the market.

Vodafone and Three have confirmed they plan to merge to create the UK’s largest mobile network. (Photo by mundissima/Shutterstock)

Announced earlier today, the merger will see Vodafone own a controlling 51% stake in the combined company, with current Vodafone UK CEO Ahmed Essam taking the top job at the new business. Three CFO Darren Purkis will assume the same role at the new business following the merger, which is due to close by the end of 2024.

Talks have been ongoing between Vodafone and Three’s parent company, CK Hutchinson, since last year, and today’s joint statement says that, if the merger is approved, the combined business will spend £11bn on improving the UK’s 5G network over the next decade.

Vodafone Three merger: the beginning of the end for Hutchinson in the UK?

As separate entities, Vodafone and Three have struggled to compete with their larger rivals, BT-owned EE and O2. The merger will give it the scale it needs to truly compete, says telecoms analyst Paolo Pescatore of PP Foresight.

“A ‘marriage of convenience’ makes sense,” he says. “Scale is key to help lower costs and improve margins. It would create a mobile champion that could increase competition in the wholesale segment of the market and become a partner of choice for mobile virtual network operators.”

But he says it will “take years before we see the real fruits of this deal come to fruition,” asks: “Can the UK wait that long?”

Pescatore adds that the deal is the first step towards Hutchinson retreating from the UK market. It runs mobile networks in Europe, under the Three brand, as well as in Asia.

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Predicting that Hutchinson’s share in the new company will “reduce over time”, Pescatore adds: “Hutchison already has an extensive presence in the UK, but this should be seen as a gradual exit from the telco market. Having the current Vodafone UK CEO heading up the new operation is a testament to this belief. His considered approach will resonate with key stakeholders and improve any chance of getting the deal over the line.”

Will the Vodafone Three merger be approved?

Indeed, the deal will need to be approved by shareholders at both companies, as well as UK competition regulator the Competition and Markets Authority (CMA).

The £11bn proposed investment is likely to help in this respect, says Kester Mann, director of consumer and connectivity at analyst business CCS Insight. But he says the deal will “face a major challenge to win approval”, adding: “At this stage, I believe it is too difficult to call either way [whether it will be approved or not].”

Mann explains: “The prospect the deal leads to higher prices will be a major concern for the CMA. Vodafone and Three may have shot themselves in the foot by recently hiking tariffs by up to 14.4%.

He believes the merger should get the green light, because “it is better to have three strong providers than two that are dominant and two that are sub-scale”, adding: “Blocking it could thwart the long-term development of the UK’s telecoms infrastructure.”

The appointment of Margherita Della Valle as Vodafone group CEO will give added impetus to the deal, Mann says. Della Valle took up her role full-time earlier this year, and has already shaken up the business, announcing 11,000 redundancies and a renewed focus on the company’s enterprise offering.

“She has shown clear intent to make changes at Vodafone as she bids to turn the embattled company’s performance around,” Mann says. “Securing approval for a tie-up with Three would be a major boost to her early tenure.”

Read more: DSIT commits to 5G UK coverage by 2030

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