Vodafone–Three Merger Still Odds-On for Approval

It’s a year since Vodafone and Three officially reached a deal to merge their UK operations. This milestone presents an opportunity to look back at what has happened in the 12 months since, and ahead to a decisive phase of regulatory scrutiny that will determine whether the deal is allowed to pass.

Regulatory Scrutiny

I’ve argued many times that the merger would be a good thing for the industry; but it’s not me who will decide. The UK’s Competition and Markets Authority (CMA) will cast the final judgment, and in March 2024 the watchdog referred the proposed tie-up to a detailed Phase Two investigation. This process will now last until at least 12 October following a recent 24-day pause allowing for CK Hutchison to submit certain documents.

Many in the industry share my view that allowing two sub-scale providers to combine — subject to a more even allocation of mobile spectrum — will lead to more efficient investment and more effective competition. But the CMA’s position is the big unknown and it certainly won’t be swayed by others’ opinions. In 2023 its decision to initially block the £54 billion merger between Microsoft and Activision Blizzard — going against its US and EU counterparts — showed a stubbornness that made it clear it likes to make up its own mind.

It’s hard to gauge the CMA’s overall position toward Vodafone–Three and whether it’s moving in a more positive or negative direction. But the narrative in its Phase One review suggested significant concerns. I was struck by a comment in which the CMA said that both Vodafone and Three are “viable and competitive businesses” and would “continue to invest in their networks absent the merger”.

This appears to counter an argument frequently put forward in favour of combining, that both companies are failing to achieve sufficient returns on expensive network roll-out. Commenting in March on its full-year results for 2023, Three UK CEO Robert Finnegan said the company’s financial performance was “clearly unsustainable despite scaling back our 5G investment”. A few weeks earlier, chief network officer Iain Milligan told me that Three has stopped expanding its 5G network geographically because of cost.

Virtual Operators Play a Crucial Role

The wholesale market could prove pivotal. Mobile virtual network operators (MVNOs) account for more than one-sixth of the market and play a leading role in maintaining its overall competitiveness. I examined the leading drivers behind the UK’s vibrant MVNO landscape in this report.

The CMA has expressed concern that moving from four networks to three would reduce the bargaining power of MVNOs, eventually leading to higher prices for customers. It appears unconvinced by an alternative view put forward by Vodafone and Three that the joint venture would create a stronger network alternative for virtual providers. They believe that combining will result in a greater incentive to fill increased capacity, presenting fresh opportunities for them.

Possible Remedies

In February the European Commission cleared the merger of Orange and MasMovil in Spain following a lengthy investigation (see Instant Insight: European Commission Approves Orange–MasMovil Merger). Some interpreted this as an about-turn in policy from regulators, after years of pushing back on deals. Although it should give fresh hope to the industry’s clamour to consolidate, it came with a major caveat. Orange and MasMovil had to make significant concessions, including divesting mobile spectrum to rival provide Digi Communications that will support deployment of its own mobile network. In my view, Digi will prove a credible challenger to Telefonica, Vodafone, and the combined Orange–MasMovil, ensuring that Spain remains a market of four scaled providers.

If Vodafone and Three must remedy their deal along similar lines, they may also be reliant on finding a third party willing to acquire assets from them. If such a player fails to come forward, it could derail their plans. They may also consider that such a requirement would undermine too much of what their deal aims to achieve.

Having already outlined an £11 billion network investment plan, they will instead hope that the CMA focuses on rebalancing operators’ mobile spectrum holdings and the process of disentangling existing network-sharing agreements instead of anything more onerous.

The crux of the deal is likely to come down to what remedies the CMA wishes to mandate and how much ground Vodafone and Three are prepared to concede. I was interested to hear the comments from Vodafone’s Group CEO Margherita Della Valle during her company’s recent full-year results earnings call, suggesting that the deal should be passed without concessions at all.

Deep down, however, I’m sure she realizes this won’t be the case. These comments are just part of a negotiation. We all know remedies are the only way this deal will get across the line; it’s just a case of how stringently they’re imposed.

Odds-On for Clearance

In December, I put the chances of the merger gaining approval with remedies at about 60%. Since then, it overcame an important hurdle when the government passed it under the National Security and Investment Act. Approval was subject to conditions relating to concerns about Three’s links to China given that it’s owned by Hong Kong group, CK Hutchison. The CMA, however, was always going to be the toughest nut to crack. Although the deal faces stern resistance, with the right concessions its chances of approval remain good.