Further discussions regarding a possible merger of Vodafone and Three’s UK operations have reportedly taken place, increasing speculation that the nation's third and fourth largest mobile operators could join forces.
The two parties were said to have been in contact last year but did not lead to anything further. Now, the Financial Times says further talks have taken place, driven by pressure from Vodafone’s largest activist investor Cevian Capital and the persistent desire for consolidation in the industry.
The exact nature of any deal was not disclosed but it is suggested that a joint-venture rather than an outright purchase could fit in with Vodafone’s strategy of minimising its debt given Three’s parent company CK Hutchison’s demands for a takeover.
Vodafone in particular believes there is too much competition in the UK market at a time when mobile operators must invest in 5G infrastructure and converged services, while also tackling the threat from over-the-top service providers to traditional revenues.
Meanwhile, as the UK’s smallest operator, Three has struggled to achieve the scale it feels is necessary to compete in such a cut-throat environment.
A merger or joint-venture between Vodafone and Three would create an entity with nearly 30 million customers to compete with BT-EE and Virgin Media O2 – both of which have gone through tie-ups of their own in recent years.
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“Both Three and Vodafone are in a challenging position given the growing importance of convergence,” Paolo Pescatore, analyst with PP Foresight, told TechRadar Pro. “While Vodafone is addressing this through wholesale agreements in the fixed line market, it is unclear whether a merger with Three UK is the silver bullet.
“A deal certainly makes sense for Three given its mobile only-position, the importance of scale in the UK market, and there are few strategic moves left. However, Vodafone will need to move quickly to avoid losing further ground.”
Three was forced to abandon a planned £10.25 billion merger with O2 back in 2016 because of hostility from UK and European regulators who feared a reduction from four operators into three would impact competition.
Both parties moved on, with O2 merging with Virgin Media (opens in new tab) in June 2021, and Three looking for other areas to grow as a pure-play operator in the UK. Three’s parent company CK Hutchison also successfully challenged the EU’s decision to block the O2 deal in 2020, with the European Court of Justice annulling the deal.
However, the indications are that regulators are softening their stance, and operators are eager to get the ball rolling. Both Vodafone Group CEO Nick Read and Three UK & Ireland chief executive Robert Finnegan have been vocal on their desire for consolidation.
Vodafone has been approached for comment. CK Hutchison declined to comment on the report.
Via Financial Times (opens in new tab)