UK arms of Vodafone and Three announce merger – now the hard part begins

After flirting with each other for months, Vodafone and CK Hutchison have formally announced they want to merge their UK operations but getting regulatory approval won’t be easy or quick.

In clear acknowledgment of the challenge the companies face in convincing regulators that reducing the number of UK mobile network operators from four to three (ironically enough) is a good idea, the vast majority of the announcement is focused on trying to communicate just that. As is not uncommon with mega M&A, they’re even created a special website for the proposed merger, which features a video in which the UK heads of each company explain how much better the country will be if they’re allowed to combine.

“The combination of Vodafone UK and Three UK will bring more choice and better value to customers nationwide,” said Ahmed Essam, Vodafone UK Chief Executive. “With scale to invest, we will create a best-in-class 5G network, supporting the Government’s 5G ambitions, drive digital transformation and create jobs. Through converged offers we will really challenge the two largest operators and, of course, we will continue to support the most vulnerable in society with our social tariffs and our commitment to help 6 million people cross the digital divide by 2025.”

“Today’s news marks a significant step in our efforts to create a business that will build the biggest and fastest 5G mobile network in the country,” said Robert Finnegan, CEO of Three UK. “The combination of Three UK and Vodafone UK will bring the advantages of 5G to every business and household in the UK, enabling the UK to deliver its ambitions for digital and economic growth and fully supporting the UK Government’s objectives for a world-leading digital economy.”

“The merger is great for customers, great for the country and great for competition,” said Margherita Della Valle, Vodafone Group Chief Exec. “It’s transformative as it will create a best-in-class – indeed best in Europe – 5G network, offering customers a superior experience. As a country, the UK will benefit from the creation of a sustainable, strongly competitive third scaled operator – with a clear £11 billion network investment plan – driving growth, employment and innovation. For Vodafone, this transaction is a game changer in our home market. This is a vote of confidence in the UK and its ambitions to be a centre for future technology.”

“Today’s announcement is a major milestone for CK Hutchison and for the UK,” said Canning Fok, Group Co-Managing Director of CK Hutchison. “Three UK and Vodafone UK currently lack the necessary scale on their own to earn their cost of capital. This has long been a challenge for Three UK’s ability to invest and compete. Together, we will have the scale needed to deliver a best-in-class 5G network for the UK, transforming mobile services for our customers and opening up new opportunities for businesses across the length and breadth of the UK. This will unlock significant value for CK Hutchison and its shareholders, realise material synergies, reduce net financial indebtedness and further strengthen its financial profile.”

You get the picture. While we’re not aware of any public statement from the UK government or regulators on this specific matter, it seems safe to assume that the two companies wouldn’t have decided to take the plunge without some confidence that the merger would be approved. Recent hints from the government will certainly have emboldened them and there have presumably have been significant behind-the-scenes exchanges. The odds seem to be in favour of this being approved, but the process could still take a long time.

“An £11 billion network investment plan will seek to allay regulatory concerns,” said Kester Mann of analyst firm CCS Insight. “But this deal will still face a major challenge to win approval. At this stage, I believe it is too difficult to call either way. 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%.

“My view is that the deal should be approved. It is better to have three strong providers than two that are dominant and two that are sub-scale. Blocking it could thwart the long-term development of the UK’s telecoms infrastructure.”

“This will be a hard sale given that both companies have been outperforming the market for the last year or so,” said independent Analyst Paolo Pescatore. “Let’s see if the authorities have a change of heart. Both parties need to demonstrate that this is genuinely in the interest of UK plc, the economy, and consumers for it to have a chance of getting over the line. Convincing the CMA will be the real test. Current investment levels are not sustainable in the longer term.”

If it is eventually approved, the new company (for the time being referred to as ‘MergeCo’) will be 51% owned by Vodafone, with an option to buy the rest off CK Hutchison down the line. Essam will head it up, with Finnegan apparently free to explore other opportunities. The announcement concludes by saying they expect the deal to close by the end of 2024, but surely the CMA can do better than that. Let’s see.

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