Potential paths to Vodafone/Three merger approval

On Friday the Competition and Markets Authority (CMA) announced the provisional findings of its full investigation into the Vodafone and Three merger in the UK. While it stated that the merger could pose competition and pricing concerns, and not necessarily lead to the significant investments promised, it also said it may be sufficient for the two telcos to merge on the basis of guardrails in the form of behavioural remedies. The end game, the antitrust authority claims, is to protect consumers and the wholesale market from price increases.

The announcement on these provisional findings now marks the beginning of a consultation period in which interested parties are invited to share any additional views in the coming weeks, before the CMA publishes its final decision on 7 December. This, of course, makes an actual merger completion by the end of this year unlikely.

Against this backdrop, we spoke to Assembly Founder and CEO Matthew Howett to find out what is on the horizon for the merging operators and what they may be willing to agree to in order to get the deal over the line. In this article we share some of his thoughts and that of other industry commentators.

Structural remedies seem off the table

With structural remedies such as asset divestment (e.g. spectrum) or the introduction of a new fourth player essentially off the table, the analyst community seems to think the findings should be viewed as encouraging for the proposed move.

“I think for [Vodafone and Three] the biggest fear last week was that the CMA was insistent on that structural remedy,” said Howett. “Anything that resulted in the introduction of more competition in the market, whether it be reserving spectrum for a new entrant or capacity for a strengthened MVNO, which we know has been used in other markets, at this stage in the review process I think for Vodafone and Three would have been too far and I think they would have probably been prepared to walk away from the transaction.”

Howett further explained that the CMA, in a way, has talked itself out of structural remedies, giving four possible reasons why that would not work as a solution, and even suggesting there may be more. “It seems pretty unlikely at this stage that they would change their mind on that. And so, with a structural remedy apparently off the table I think Vodafone and Three would be quite buoyed by that and, therefore, I think we can for the first time see that kind of route through.”

Vodafone/Three reaction to the provisional findings

Despite the good news on structural remedies most likely excluded, following the CMA announcement, Three CEO, Robert Finnegan, expressed somewhat of a disdain in a LinkedIn post as the telecom veteran called the merger a “once-in-a-generation opportunity” for the UK’s digital infrastructure as the entities promise investments of £11bn.

“Vodafone and Three UK disagree with the CMA’s Provisional Findings that the merger raises competition concerns and could lead to price rises for customers.” he said. “By all measures, the merger is pro-growth, pro-customer and pro-competition. It can, and should, be approved by the CMA. … We are determined to reassure the CMA in relation to their provisional concerns and work with them to secure the extensive benefits this merger brings for UK customers, businesses and wider society.”

Similarly, Vodafone Group CEO Margherita Della Valle touted the merger as a ‘catalyst for change’ and that the time had come ‘to take off the handbrakes’. But these are not surprising comments. Howett further elaborated that “if you go right back to the beginning of the process, the Vodafone Group CEO said that, in her view, no remedy would be appropriate to get this through. And, I think, as I said on Friday, that would be a sort of fanciful notion that you'd approve it with no remedies. So, I think, there is obviously a part of a bit of game play as part of this.

“There is that backwards and forwards between the CMA and the operators, but I think Vodafone and Three would accept behavioural remedies in the areas of things that they've already talked about. So, the investment commitment being one, they said they would invest £11 billion. It seems to me that they would probably be accepted to have Ofcom hold their feet to the fire with that if it meant getting clearance.”

Potential red lines for Vodafone/Three options for behavioural remedies

Further, talking about where the merging operators would draw the line in terms of suggested remedies, Howett reasserted that “the red line would be the structural remedy, whether on its own or with anything else. I think that would be the red line for both of them. I think they would argue that the only behavioural remedy you need is the commitment to invest, which I think they would be prepared to sign up to. I think what the CMA is saying is that, yeah, we think that is a possible remedy but we're a bit worried that it might sort of take a while for them to actually make those investments and for us to monitor via Ofcom compliance with it.

“And so they talked about a sort of ‘stop gap’ until the investments start to come through and, of course, can start to measure it. Where you might also introduce some behavioural remedies in the form of some retail level protection for consumers and wholesale level protection for MVNOs by sort of looking at setting prices in those two areas.

“I suspect that Vodafone and Three will argue to the CMA that they don't need those and that the investments will happen quickly, and Ofcom can see them. But if the CMA is sort of adamant on those retail level and wholesale level protections in terms of prices, I think you know they probably would. They would accept them maybe for a time limited period.”

CMA merger remedies

A CMA merger remedies document CMA87 draws out a number of possible remedies it may suggest in mergers and acquisitions, though it does say adjustment will be made to ensure the individual circumstances of a merger or joint venture are met. In its chapter 7, the 2018 document outlines two possible remedies that seem relevant to the case at hand.

Firstly, it speaks of remedies regarding restraining horizontal market power (where 2 forms conduct in a horizontal merger as is the case in Vodafone and Three) which may lead to limiting or restraining competition. Secondly, it speaks of price caps as the most common form of measure to control outcomes and prevent the newly built joint venture from exercising enhanced market power.

As a result, we also spoke about pricing and the UK market with Howett. He suggested that the consumer market is already very competitive and that we have some of the lowest prices in the region, e.g. when compared to France, Germany, Italy, Spain but also when compared to outside of Europe and to the US and Japan. This means, he explained, that even if we didn’t have any protections in place, the price increases we can expect would not see a “complete reversal of where the UK sits relative to other countries” and remain fairly low.

“If you do get some kind of commitment to protection of consumers, particularly at the lower end of the market, whether it's even more advantageous social tariffs, you know these are the sort of things that operators have been doing voluntarily and willingly anyway. So having a sort of commitment there for a limited period is probably something that they would accept, if it was a particularly firm sticking point for the CMA” concluded Howett.

Telecoms as a utility service

In similar lines, Dario Betti, CEO at MEF (Mobile Ecosystem Forum) touts the CMA findings as “change requests”, making them sound as though they were some minute detail to be discussed but that the deal was ultimately approved already. Meanwhile, he questioned the overall telecom business model and the matter of telcos turning into utility services, a notion that has been daunting the industry for some time now.

“The CMA's cautious stance is understandable” said Betti. “It faces a tough choice: balancing the need for lower prices with the necessity of increasing investment in the telecom industry. This decision reflects a broader question: should telecom services be treated as utility services like water, electricity, and gas, where government oversight limits prices but stifles innovation? Or should the industry operate as a free market, where businesses innovate, set prices, and consolidate freely? And finally, is it mobile networks that matters or should we look more at the role of the Big Tech that are now running the services on top of the data networks instead?

“The real debate is not whether your phone bill will rise in the future — it likely will, given Europe's low prices and the increasing demand for more complex technologies. Instead, the question is: who will you be paying for communication services? A mobile operator or an internet company?”

What’s on the horizon for the UK and the rest of European telecoms market?

Looking ahead into the next six months and more, Betti continued: “This debate isn't limited to the UK. On the same day, the Italian sale of Vodafone Italia to its competitor Fastweb (owned by Swisscom) was delayed for further analysis by the Italian Competition Authority. However, the deal is expected to move forward by Spring 2025.

“The Vodafone-Three merger in the UK is just the beginning of significant changes in the communications market. Expect more mergers and heated debates as the number of mobile networks — and their names — continue to evolve. The telecommunications landscape, both in the UK and across Europe, is entering a period of substantial transformation.”

If the deal is approved, as so many analysts predict, this merger is highly likely to set precedent in the rest of Europe and truly act as a ‘catalyst for change’, to take Della Valle’s words. But the previous CMA investigation phase raised concerns among some interested parties, with BT seemingly the loudest as it warned of lessening of competition in the face of ‘extreme capacity and spectrum asymmetry’.

Seeing as this next period is once again one where all interested parties can submit their views, including other operators in the UK, we can certainly expect to hear and read more about what the other UK players think of CMA approach and structural remedies being off the table.