Vodafone confirms merger talks with Three UK

Vodafone and the owner of Three UK have confirmed they are in talks about a possible merger that would create the UK’s largest mobile operator.

Vodafone and CK Hutchison, the parent company of Three UK, have long been considered potential merger candidates amid the wave of consolidation in the UK and European telecoms sectors in recent years.

A merger of Vodafone and Three – the UK’s third and fourth largest mobile operators respectively – would catapult the newly combined company over rivals EE and O2 to more than 27 million subscribers.

“Vodafone confirms that it is in discussions with CK Hutchison Holdings regarding a possible combination of Vodafone UK and Three UK,” the company said in a statement. “In the proposed transaction, both companies would combine their UK businesses, with Vodafone owning 51% and our partner CK Hutchison owning 49% of the combined business.”

The first admission of talks between the two companies follows French telecoms billionaire Xavier Niel and Swedish activist investor Cevian, who has taken a stake in Vodafone, whose shares have more than halved since 2018. Shares of the company closed up 2.6% on Monday.

Hong Kong-based Hutchison has been eyeing a sale after failing to bring Three UK, which launched more than two decades ago, to the size of the top three players, EE, O2 and Vodafone.

In February Vodafone chief executive Nick Read said he was in talks with rivals in its biggest markets to close deals “quickly and decisively”, arguing that Europe’s telecoms industry needed to consolidate to create more profitable and attractive businesses investors.

Vodafone said a deal to create a larger telecoms group was needed given the huge costs of rolling out and maintaining new 5G networks.

“Conditions for thriving competition in the market must be encouraged or the UK risks losing the chance to become a 5G leader,” Vodafone said. “As Ofcom has noted, some operators in the UK – Vodafone UK and Three UK – lack the necessary scale to earn their cost of capital.

“By bringing our businesses together, Vodafone UK and Three UK will have the scale needed to accelerate the rollout of full 5G in the UK and extend broadband connectivity to rural communities and small businesses.”

The companies said the deal would not include a cash component – Vodafone has twice Three’s customer base – with the relative ownership structure to be achieved through a “differentiated leverage contribution” with debt. Vodafone has about 18 million mobile subscribers compared to Three’s 9.3 million.

The merger would be the subject of an in-depth investigation by the Competition and Markets Authority. However, Vodafone pointed out that BT bought mobile operator EE in 2015, while Virgin Media and O2 merged in 2020.

“The merged entity would challenge the two already consolidated players for all UK customers and bring benefits through affordable access to a third reliable, high-quality and secure 5G network across the UK,” said Vodafone.

In February, Ofcom, the UK telecoms regulator, paved the way for a potential Vodafone Three deal by abandoning its long-held belief that a merger between one of the UK’s big four mobile operators should be blocked at all costs.

Ofcom changed stance, saying any potential merger “would be informed by the specific circumstances of that particular merger and not just by the number of competitors”.

The regulator has previously specifically stated in its annual plans that the UK market needs four leading mobile operators to operate efficiently.

“While parties may view consolidation as an opportunity to enhance returns and unlock shareholder value, we anticipate that the CMA will seek to protect against the risk of rising consumer prices – particularly given the current cost of living crisis.” said James Robinson, a senior analyst at Assembly. “We therefore anticipate that this issue will be the most contentious point within a three-Vodafone merger and would potentially require legally binding concessions.”

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