Vodafone–Three Merger Looks Set for Green Light

Vodafone and Three would have breathed a huge sigh of relief this morning as the long-awaited findings of the UK Competition and Markets Authority (CMA) into the proposed merger appeared to offer a path to approval.

At first glance, the watchdog’s statement makes for uncomfortable reading, raising once again clear concerns about the threat of higher prices and the impact of reduced choice in the wholesale market. In its biggest setback, it said that claims of superior network quality post-integration are “overstated” — this would have hurt given the £11 billion network investment programme initially outlined.

But Vodafone and Three always knew that winning over the watchdog was going to be a monumental task and one likely to necessitate further commitments. In July, the merging parties took an important step forward by agreeing to sell spectrum to Virgin Media O2 and extend the Beacon network sharing agreement. This seems to have allayed some competition concerns in these areas, although the amount of spectrum and which frequencies hasn’t been revealed.

In my view, the most crucial part of the CMA’s statement is its apparent willingness to consider “behavioural remedies” such as better terms for virtual providers, more support for disadvantaged customers, and the option for customers to “roll over” their existing contract terms for a predefined period. This is significant as I had feared that more onerous “structural remedies” — such as selling major assets or supporting a new entrant — could be required to get the deal over the line. This happened earlier in the year in Spain, where a joint venture between Orange and MasMovil was only approved after the European Commission mandated the sale of spectrum to Digi to help it deploy a new mobile network.

Such a stance in the UK would probably have extinguished the deal. Vodafone and Three would have almost certainly pushed back on accepting proposals that would only serve to undermine the rationale of them coming together in the first place. In this sense, a major potential barrier has been removed.

Concern about price rises was always going to be front and centre of the CMA’s investigation. But I’ve never really seen this as a major reason to block the deal. Even by moving from four networks to three, the UK will remain highly competitive, supported by a large and fast-growing market of virtual providers. CCS Insight’s latest UK forecast shows that under the scenario of the merger being approved, average monthly customer spending would only be a few pence higher than if it’s blocked.

Admittedly, recent plans outlined to raise tariffs by up to £1.80 per month don’t sound great, particularly for people on low incomes and during the current period of economic uncertainty. An opportunity to address this would be to make commitments on existing social tariffs or offer new ones. But let’s also remember that UK consumers still enjoy some of the best-value mobile plans in Europe.

The debate on pricing extends to the wholesale market and here I see both sides of the argument. Eliminating a network would mean fewer potential partners for virtual providers, potentially stifling their growth. But it would also create a stronger network alternative with a greater incentive to fill increased capacity.

Either way, both pricing and wholesale are areas that should be relatively straightforward to propose behavioural remedies acceptable to the CMA.

So, the ball is now firmly back in the court of Vodafone and Three, which must act quickly and decisively to assess today’s report and make suggestions ahead of a final deadline in early December.

It appears to have made a good start. In its response to the CMA, Vodafone made a commitment that its network investment plan can be independently monitored and enforced by Ofcom.

I retain my view that approving the merger would be the best outcome for the UK mobile industry. A combined Vodafone and Three can make more-efficient investments and push BT and Virgin Media O2 to raise their game too, boosting the market’s long-term connectivity credentials. This will be crucial not just to millions of households and businesses but also in supporting wider economic recovery.

The next three months may prove to be the most pivotal in the history of the UK telecom sector. Vodafone and Three have much work still to do, but the finishing line may now finally be in sight.