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The U.K.’s Competition and Markets Authority (CMA) has confirmed that it’s launching a formal “phase 2” investigation into the planned merger between Vodafone and Three UK. The CMA says that the deal could lead to higher prices for consumers, while also impact future infrastructure investments. However, the CMA has given both parties a token five […]
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The mobile market in Europe and the U.K. — once orchestrated to be ripe ground for competition — has been on a long-term course of consolidation, and the latest chapter in that story was made official today. Vodafone Group and Hutchison Group have announced a plan to merge their U.K. carriers, respectively the eponymous Vodafone and Three.
The companies said there is “no cash consideration to be paid” in this merger and it would also include debt from both businesses.
The combined business, if calculated using today’s users numbers, would have around 28 million subscribers — Vodafone has nearly 18 million and Three has just over 10 million as of May 2023) — and would be worth some £15 billion (nearly $19 billion at today’s rates), and would be 51% owned by Vodafone and 49% owned by Hutchison.
The companies said that they expect the merger to be completed by the end of 2024 — subject to regulatory approvals.
That might not be as seamless as it sounds. Previous carrier mergers have taken years and years to work through, and they have not necessarily worked out as the parties have hoped they would. Back in 2015, Hutchison famously tried to acquire Telefonica’s UK business, called O2, to combine it with Three for £10.25 billion.
That deal was quashed by regulators, then appealed, only to finally once again get quashed… in April of this year. That’s right, eight years later, and while Three pursues a different combination, it’s still embroiled in regulatory red tape over a different deal.
This latest deal between Vodafone and Three has been in the works for months, so not quite as long — not even behind closed doors. Three U.K.’s CEO Robert Finnegan in March said that his company’s network would be “unsustainable” without a merger with Vodafone. A deal was expected to be announced this week.
Combining would indeed give both companies much greater economies of scale when it comes to building out costly network for 5G and beyond, as well as in operating it.
Vodafone back in the 1990s and early 2000s was the country’s biggest mobile carrier. It then lost that position to O2 and EE (which itself was formed from a consolidation of T-Mobile UK and Orange UK). Three was always a late entrant to the UK market, coming into the frame with the arrival of 3G in the late 1990s. All of these carriers, however, are contending with what is a finite market, hence the turn to consolidation to improve margins in what is a thin-margin business.
It also comes at a time when tension continues to exist between carriers, tech companies and media giants. Consumers are using smartphones, and mobile networks, to consume a huge amount of content these days, but in many ways carriers have been disaggregated from the most lucrative part of that relationship — owning the customer and making a cut on payments for those media services. Thus, there remain a lot of questions and disagreements over who should be carrying the cost can for that service, and whether carriers are getting a significant cut on revenues from that.
“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,” said Canning Fok, group co-MD of CK Hutchison, in a statement. “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.”
The companies added that “The Transaction is expected to result in substantial efficiencies. These are expected to amount to more than £700 million of annual cost and capex synergies by the fifth full year post-completion, with an implied NPV of over £7 billion.”
The companies said that they would commit £11 billion to building more network in the U.K. over the next decade, focusing on 5G. It would also expand its fiber network for fixed broadband access to cover 82% of housholds by 2030.
“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,” said Margherita Della Valle, Vodafone Group Chief Executive, in a statement. “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.”
Vodafone and Three plan to merge in the UK in a $19B deal (if regulators approve) by Ingrid Lunden originally published on TechCrunch
Another major piece of mobile M&A appears to be in the works in the UK. Today, Vodafone confirmed that it was in merger discussions with Three UK, a carrier owned by CK Hutchison, to accelerate their 5G rollout. A deal would not involve any cash consideration, Vodafone said:
“The envisaged transaction would involve both companies combining their UK businesses, with Vodafone owning 51% and our partner CK Hutchison owning 49% of the combined business,” it wrote in its official statement to the market published earlier today. The statement itself was made in response to press speculation around a possible deal, Vodafone noted. It described the combination as a “no cash” deal — that is, no actual price tag, or deal valuation, or other financial consideration paid as there might be with an acquisition.
Vodafone is traded publicly in the UK, and its market cap is currently around £28.7 billion, or $32.2 billion at today’s rates. CK Hutchison has a market cap of about $21 billion (but that also controls other assets).
The story of mobile carriers in the UK has been one of saga-style soap opera proportions. Three has a major attempt at a merger in its past, a £10.25 billion deal for rival carrier O2. That deal however was blocked by regulators in 2016; only for regulators, four years later in 2020, to overturn that decision.
O2 by that point had moved on to a different combination: it had merged with Virgin Media/Virgin Mobile (which itself had been acquired and merged by Liberty Media with its older pay-TV assets) in a $39 billion deal. Meanwhile, EE — itself a merger of T-Mobile and France Telecom’s acquired and then spun out again Orange — was snapped up by BT (which used to own O2, then spun it out, and then also had reported designs to buy it back) in a $19 billion deal. (Three also made some smaller deals in the interim, such as this one for $373 million for UK Broadband to gain more mobile spectrum.)
Vodafone was always an arm’s length from all those scraps.
Arguably, part of the reason why was that it was the market leader in Europe overall, and specifically the UK. Those different M&A moves, however, did have the effect of helping those other carriers get more scale, and thus putting more pressure on the market leader.
Now Vodafone needs Three’s scale to compete, and Three needs Vodafone. Or at least that is likely what they will argue if they do move into a formal process and the deal comes up for regulatory clearance. That overturned merger ruling in Three’s past didn’t lead to Three getting together with O2, but in the end it might still prove useful, by laying the groundwork for approving any subsequent big mergers that Three attempts, such as this one now with Vodafone.
The big takeaway from all of the above is that mobile carriers are always aiming for more scale — critical to the economics of the capital-intensive, infrastructure-intensive carrier business model, but these days all the more important because of the data and customer ownership that this scale brings carriers, and because of there are fewer routes for carriers monetizing users, given how much content and services have decoupled from customers’ carrier relationships.
The issue of scale is also at the heart of this latest deal.
Vodafone is playing its merger card very carefully here. It notes that the deal would be made to speed up 5G rollout through a larger single network, specifically that it would make such a rollout more financially viable — using a statement from the government itself about the two carriers to back up its assertion.
“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,” it notes, but, “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.”
This is just step one in the process, which may or may not ever end up in a deal; Vodafone said that it and Three would be making more statements as and when talks progress, so watch this space.
Vodafone confirms merger talks with Three UK in a “no cash” deal to scale up in 5G by Ingrid Lunden originally published on TechCrunch