Vodafone and Three Merger: Six Months On, Where Does It Stand?

Today marks six months since Vodafone and Three confirmed they had reached a deal to combine their UK operations.

If approved, the merger would reshape the mobile landscape in the UK so it’s hardly surprising that it’s one of the topics I receive most questions about from clients. Here I answer some of the most common and give an update on where things stand and where I see them headed.

What’s the latest?

In October 2023, the Competition and Markets Authority (CMA) invited comments from “interested third parties”. That process closed on 1 November, and I presume that the watchdog is reviewing the submissions.

The next step will be for it to fire the starting gun on the first-phase review, which will last up to 40 days. Given how close we now are to Christmas, I expect that it’ll happen early next year. If — as seems almost certain — the CMA concludes that competition could be adversely affected by the merger, a much longer second-phase investigation will begin, taking up to 24 weeks.

Why’s it taking so long?

I can understand why some people are thinking that things are progressing slowly. But it would be wrong to accuse the CMA of dragging its feet. Don’t forget, unlike Ofcom, the CMA isn’t an expert in the telecom industry and needs time to get up to speed with the uniqueness of the case and the complexities of the market. In addition to an initial period of pre-filing, multiple discussions have taken place at various levels involving teams from Vodafone and Three.

I don’t sense any frustration from Vodafone or Three either at the rate of progress; so, it looks like it’s a matter of accepting that such a major decision is naturally going to take a fair chunk of time.

Has the tide turned for or against the merger?

Back in June, I said that the merger looked poised on a regulatory knife edge, and this is still the case.

Admittedly, the past few years appear to have heralded more openness from regulators toward mergers, with Ofcom notably clarifying its position by stating it would assess any deal on its individual merits.

But the CMA won’t be won over easily. Its decision to initially block the £54 billion merger between Microsoft and Activision Blizzard earlier in 2023 — going against its US and EU counterparts — showed a stubbornness that probably gave Vodafone and Three a few jitters. The CMA eventually cleared it, with remedies.

A potential boost for Vodafone and Three came in a ruling last month by the European Commission which, according to Reuters, found no evidence of competition concerns over the deal. It’s hard to know how much we can deduce from this as it made its judgment using a simplified mechanism over just a few weeks. Still, considering that the commission blocked Three’s acquisition of O2 in 2016, it could be a positive indicator.

Firmer clarification of its position on mergers should come early next year in Spain: Orange and MasMovil are hoping that by selling assets to rival Digi they will allay the commission’s competition concerns and win approval to combine their operations.

What have people been saying?

Unsurprisingly, Vodafone and Three have continued to talk positively about the merits of their merger. Vodafone has been particularly vocal, eulogizing about potential cost savings in the NHS; the opportunity to narrow the rural digital divide; and the economic benefits to the UK of having better 5G coverage. I’m often sceptical about the basis of some of these claims as they’re extremely difficult to quantify. But I don’t blame its PR team for doing everything it can to convince people to support the deal.

Understandably, closest rivals BT and Virgin Media O2 have kept their cards closer to their chests. Neither has officially set out its position, but both have confirmed ongoing engagement with the CMA at various levels.

I imagine they’re broadly supportive, because the deal should cool the competitive intensity of the market by reducing the number of players. But I expect they have two major concerns: to ensure an even distribution of mobile spectrum, particularly in the mid-band, and to gain clarity on the potential path to dismantle long-standing network-sharing agreements (Vodafone with Virgin Media O2 and Three with EE) — an already complex process that could become even more challenging because of the UK government mandate to remove network equipment from Huawei.

The most ardent dissenter has been the Unite union. It described the merger as a “terrible deal for Britain”, raising concerns about security, job losses, prices and investment. Consumer rights organization Which? has also weighed in, citing reservations about choice, service quality and prices.

When will we know the outcome?

The earliest we’ll get a firm decision is next autumn. If intense negotiations are needed — for example over which company buys assets that the joint venture could be forced to divest to get it over the line — the process could run on much longer.

Should the CMA approve the deal?

I wrote back in June that I thought the deal should be approved, subject to a balanced distribution of mobile spectrum, and I’ve heard nothing since to change my mind.

A combined Vodafone and Three can use its greater scale to make more efficient investments that would improve connectivity for everyone. It would also bring much-needed competition to BT and Virgin Media O2, prompting them to raise their game too. For me, the UK’s vibrant market of virtual providers will ensure competition remains strong, preventing major further price rises beyond the mechanisms already in place.

Will the CMA approve it?

This is the big question. Although it faces stern resistance, I think the merger will sneak through. But to ensure the green light, the two parties will probably need to make further commitments. I believe they would be prepared to concede further ground given their precarious future as standalone operators if the deal gets blocked.

As things stand, I’d put the chances of the merger gaining approval at about 60%.

What are the challenges beyond regulation?

Convincing the CMA of the merits of the deal is just the start. Combining two mobile networks is a herculean task; if approved, the joint venture will need to carefully manage the integration to ensure there’s no impact on customer service. It’ll also eventually have to make difficult decisions in areas like the choice of network suppliers, branding, jobs and retail.