Vodafone confirmed it was in merger talks with Three UK this morning, setting the scene to become the largest mobile telecoms supplier in Britain.
The FTSE 100 firm said it was in discussions with CK Hutchison, Three’s Hong-Kong parent company, with the view of combining the two UK arms, with Vodafone owning 51 per cent and CK Hutchison the remaining 49 per cent.
An industry analyst suggested the merger could be worth around £12bn, bringing together 27 million customers – making it bigger than both Virgin Media O2 and BT-owned EE.
“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,” Vodafone said in an update.
It is understood that Vodafone and CK Hutchison are looking to ink the deal by the end of the year and insiders told Sky News that talks were at a “relatively advanced” stage, but still faced a number of regulatory hurdles from the likes of the Competition Markets Authority (CMA), as well as Ofcom.
“Getting approval from the CMA will not be easy. There are concerns about investment levels falling and prices going up if there is a merger,” Enders Analysis telcos expert Karen Egan told City A.M.
“But we haven’t seen any evidence that supports concerns – taking out the duplication costs of a fourth operator actually lowers the cost-base of the industry and ultimately that helps to keep prices low,” she explained.
By contrast, analyst at CCS Insight Kester Mann said the sentiment towards telecom mega 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,” he said, explaining that the market is much more receptive towards consolidation than it used to be.
CK Hutchison successfully challenged the EU’s decision to block the Three-O2 merger deal in 2020, with the decision later annulled and hopes for further tie-ups reignited.
However, Mann was keen to emphasise that “the devil was in the detail” moving forward, with the UK competition watchdog likely to dig into a deal of this size.
The CMA were unable to comment on the deal.
An unlikely pairing becomes likely
Rumours of a potential tie-up have circulated for months, with City A.M. reporting earlier this year that the UK’s third and fourth largest mobile network operators were gearing up for talks.
Commenting on the potential deal, TMT analyst at PP Foresight Paolo Pescatore said: “Remaining players including TalkTalk, Three and Vodafone are all in a challenging position given the growing importance of convergence.
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.”
Egan told City A.M. that while the Vodafone-Three deal would create a “more credible” competitor for EE and O2, “the problem is that everybody knows that so the bigger players won’t cede it”.
Vodafone has been under increasing strain to speed up its organisational overhaul after it was revealed earlier this year that a notorious activist investor Cevian had taken a stake in the firm.
Despite Vodafone’s recent rejection of Italy’s Iliad and private equity titan Apax Partners’ takeover approach, it is understood that Cevian are keen for the UK firm to pursue consolidation in key markets.
While Three UK declined to comment, chief Robert Finnegan did signal towards market consolidation back in March after the mobile giant reported humble revenue growth, despite hitting its strongest contract boom since 2012.