Vodafone and Three confirm possible merger talks

(Image credit: Three)

Vodafone has confirmed it is in discussions with CK Hutchison, parent company of Three, regarding a potential merger of their UK operations in a move that would create the country’s largest mobile operator in terms of subscriber numbers.

The two parties are believed to have been in talks since late last year but interest on both sides has accelerated in recent months, with both believing the presence of four major operators in the UK mobile market is unsustainable.

Vodafone believes the level of competition makes it difficult to invest in 5G and converged network infrastructure, while CK Hutchison has been looking for a way out of the market, believing Three lacks the scale necessary to become a major player in a cutthroat environment.

Vodafone Three 

Both Vodafone Group CEO Nick Read and Three UK & Ireland chief executive Robert Finnegan have been vocal on their desire for consolidation.

Although Vodafone has the larger UK business and CK Hutchison might prefer a clean exit, the former is more interested in a joint-venture than an outright takeover that would add to its debit pile.

Under the terms of the proposed deal, Vodafone would own 51% of the combined entity and CK Hutchison the remainder of the shares.

Unlike BT-EE and Virgin Media O2, the merged business would lack its own fixed infrastructure but would have 30 million customers and significant spectrum holdings– both of which would be significant assets moving forward.

“The UK Government rightly sees 5G as transformational for the economy and society and critical to the UK becoming more competitive in an increasingly digital world,” said Vodafone. 

“The conditions to ensure thriving competition in the market need to be nurtured, otherwise the UK is at risk of losing the opportunity to be a 5G leader. As Ofcom has identified, some operators in the UK - Vodafone UK and Three UK - lack the necessary scale to earn their cost of capital.

“By combining our businesses, Vodafone UK and Three UK will gain the necessary scale to be able to accelerate the rollout of full 5G in the UK and expand broadband connectivity to rural communities and small businesses.

“The merged business would challenge the two already consolidated players for all UK customers and bring benefits through competitively priced access to a third reliable, high quality, and secure 5G network throughout the UK.”

Regulatory hurdles?

It is probable that the Competitions and Markets Authority (CMA) will want to investigate the proposed transaction given it will significantly alter the market landscape, but regulators across Europe are now more sympathetic to consolidation than they were a few years ago.

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.

Regardless, even the CMA is more permissive than it might have been in the past, it is likely it will attach significant conditions to any deal, particularly when it comes to spectrum. Three has also traditionally been a disruptive brand, which might also have an impact on any ruling.

Steve McCaskill is TechRadar Pro's resident mobile industry expert, covering all aspects of the UK and global news, from operators to service providers and everything in between. He is a former editor of Silicon UK and journalist with over a decade's experience in the technology industry, writing about technology, in particular, telecoms, mobile and sports tech, sports, video games and media.