Vodafone and Three agree merge UK mobile assets in £15bn deal

Vodafone and CK Hutchison have reached an agreement to merge their UK telecoms businesses in a £15 billion move that will create the country’s biggest mobile operator.

The long-mooted move will bring together the third and fourth-placed telco firms, in a new group that combined will have around 27 million mobile customers. It will be majority owned by Vodafone with a 51% stake.

The combined unit- should the merger be approved by regulators – will surpass BT and its subsidiary EE as the UK’s biggest mobile provider, pushing VMO2 back into third place.

The deal could face regulatory challenges, however, as the Competitions and Markets Authority may be concerned about reducing the number of first party operators from four down to three, something that has stymied consolidation in the UK market in the past.

The two groups said they would invest £11bn over 10 years to create, what they described as, “one of Europe’s most advanced standalone 5G networks”.

The new business, they said, will be led by current Vodafone UK boss Ahmed Essam and result in annual savings worth £700m by the fifth year. It follows talks that have been running since last Autumn, first initiated by former Vodafone Group CEO Nick Read.

His successor, Margherita Della Valle, said: “The merger is great for customers, great for the country and great for competition. 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.”

This isn’t the first time Hong Kong giant CK Hutchison has tried to gain a larger grip on the UK telecoms space through M&A activity, after it attempted to buy O2 from Telefonica in 2016. The deal was ultimately blocked by the European Commission due to concerns over competition.

However, following Brexit, the deal may not face the same scrutiny on the continent, meaning it will up to the UK’s Competitions and Markets Authority as to whether the tie-up goes ahead.

According to PP Foresight analyst Paolo Pescatore, the deal could still face challenges given that both operators have been outperforming the wider UK market for the last year or so.

“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,” he added.

On why they have decided to move now, Pescatore commented: “A marriage of convenience makes sense. Scale is key to help lower costs and improve margins. It will take years before we see the real fruits of this deal come to fruition.

“The question is, can the UK wait that long? However, convergence still remains the Achilles heel if this does get over the line. It would create a mobile champion that could increase competition in the wholesale segment of the market and become a partner of choice for MVNOs.”

Scale up

Under the plans, Vodafone has an option to buy up CK Hutchison’s stake three years after completion, which is expected by the end of 2024. It presents a potential opportunity for Hutch to exit the UK telecoms market with the company understood to have been exploring a sale of Three for some time.

Canning Fok, Group Co-Managing Director of CK Hutchison, said: “Today’s announcement is a major milestone for CK Hutchison and for the UK. 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.”

CCS Insight analyst Kester Mann claims the long-awaited merger represents the “biggest shake-up” of the UK’s mobile telecoms market in over a decade.

“The deal makes plenty of sense as both providers are sub-scale,” he added. “As separate entities, it would have been near impossible for either to grow enough organically to come close to challenging BT or Virgin Media O2 for size. Inevitably however, there will be widespread fears over job cuts.

“An £11 billion network investment plan will seek to allay regulatory concerns. 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.”