Good Things Come in Threes? Examining the Vodafone/Three Merger
Vodafone and Three have agreed to a merger that will create the UK’s largest mobile operator.
The deal is currently under review by regulatory bodies such as the Competition and Markets Authority (CMA), the Office of Communications (OfCom) and the European Commission. If passed, Vodafone will own 51 percent of the combined business while CK Hutchison, owner of Three, will own 49 percent.
According to deal documents, Slaughter & May are advising Vodafone, while Freshfields Bruckhaus Deringer and Linklaters are advising CK Hutchison. The deal is valued at £15 billion.
If the deal passes scrutiny from competition regulators, the resulting merger will have a combined subscriber base of over 27 million. This would make Vodafone/Three the largest mobile phone operator in the UK, in comparison to BT’s EE, which has 21.7 million subscribers and Virgin Media’s O2, which has 23.8 million subscribers. Currently, Vodafone and Three are the third and fourth largest operators in the UK respectively.
The merger would also represent a move from four leading mobile competitors in the UK down to three. Previously proposed deals, such as the Three/O2 merger in 2016, were rejected due to regulatory fears concerning lack of competition if the number of competing companies were reduced. Likewise, regulators will need to be persuaded that competition will not be negatively impacted if the current Vodafone/Three deal were to pass.
Ofcom, the UK government’s regulatory and competition authority for telecommunications, previously stressed the importance of having four leading mobile players. However, their stance has recently softened as they will consider ‘the specific circumstances of [a] particular merger, rather than just the number of competitors.’
This change in sentiment may be attributed to a growing drive to invest in new infrastructure, particularly 5G infrastructure. As 5G becomes the new normal, the UK needs a mobile network that is willing and able to invest into new technology.
A similar benefit was emphasised in 2016’s rejected Three/O2 merger. Rory Cellan-Jones, a technology correspondent for the BBC, suggests that the lack of competition should not be a key focus, highlighting that despite ‘just a handful’ of competing operators in the U.S., they have benefitted from a much faster 5G rollout.
Essentially, the Vodafone/Three merger would generate a mega-company in which investment could be more targeted, rather than thinly spread out. In a press release announcing the deal, Vodafone stressed the merger’s commitment to ‘invest[ing] £11 billion in the UK over ten years to create one of Europe’s most advanced standalone 5G networks’. As a result, consumers may benefit from more choice and better deals.
Furthermore, Vodafone/Three has proposed a five-year price freeze to calm concerns over pricing power that comes with a lack of competition. This is yet another common clause the deal shares with the rejected 2016 Three/O2 merger.
Still, despite the potential advantages, regulators and consumers are sceptical towards the deal.
In particular, Vodafone has recently been criticised for implementing above-inflation price hikes to customers, and have cited high energy bills as a primary reason for this decision. Moreover, new CEO Margherita Della Valle outlined cutting 11,000 jobs over the next three years to ‘simplify’ the telecoms giant. That is a cut of just over 10% of 104,000 global staff. A successful merger is likely to further intensify layoffs in the short run.
Yet another issue is hesitancy to merge British-owned Vodafone with Three, which is owned by Hong Kong-based CK Hutchison. This is given the potential national security risk if the largest mobile network in the UK is significantly controlled by a foreign company. Fears that the merger could ‘deepen ties to the Chinese state’ are also being considered by competition regulators, as the deal will need to gain National Security and Investment Act approval from the UK government to pass.
Whether the Vodafone/Three merger will be approved by regulators remains to be seen. Considering the rejected 2016 Three/O2 merger, it is likely to be a close call. If the deal passes, the potential impact of a transformed mobile operator industry will be interesting to watch.