Vodafone/Three UK merger on a ‘knife-edge’

• The UK Competition and Markets Authority (CMA) has been examining the planned merger between Vodafone UK and Three UK
• Now the CMA has referred the merger for an in-depth investigation
• Analyst says the deal is on a ‘knife-edge’ and that the operators are set to offer concessions to alleviate competition concerns

Just a day after Three UK used its annual financial results to further make its case for UK mobile network consolidation, the UK’s Competition and Markets Authority (CMA) has instigated a more in-depth probe into the planned £16.5bn merger between Vodafone UK and Three UK as it is concerned that reducing the number of infrastructure-based telcos in the country from four to three could “leave consumers and businesses worse off”. 

The proposed merger, which would create the UK’s biggest mobile operator measured by retail customer numbers (ahead of BT’s EE and Virgin Media O2), was announced to the industry in June 2023: The CMA then launched its initial Phase 1 investigation in January this year once it had all the information it needed from the operators’ parent companies. 

That Phase 1 review focused on whether the merger would lead to a “substantial lessening of competition” and adversely impact consumers and businesses in the UK, and left the CMA concerned that the merger “could lead to mobile customers facing higher prices and reduced quality. [It] is concerned that combining these two businesses will reduce rivalry between mobile operators to win new customers. Competitive pressure can help to keep prices low, as well as provide an important incentive for network operators to improve their services, including by investing in network quality,” noted the CMA in this announcement. 

The watchdog is also concerned that reducing the number of telcos “may make it difficult for smaller mobile ‘virtual’ network operators [MVNOs], such as Sky Mobile, Lebara and Lyca Mobile, to negotiate good deals for their own customers, by reducing the number of mobile network operators capable of hosting these ‘virtual networks’.” 

In addition, the CMA is sceptical about the many benefits that Vodafone and Three claim their merger would deliver to the UK sector and believes those claims require a more “detailed assessment”, which the Phase 2 probe could undertake. 

“Whilst Vodafone and Three have made a number of claims about how their deal is good for competition and investment, the CMA has not seen sufficient evidence to date to back these claims,” noted Julie Bon, Phase 1 decision-maker for this case at the CMA. “Our initial assessment of this deal has identified concerns which could lead to higher prices for customers and lower investment in UK mobile networks. These warrant an in-depth investigation unless Vodafone and Three can come forward with solutions.”

The operators have five days to respond “with meaningful solutions” that can alleviate the CMA’s concerns before the Phase 2 process commences. 

The operators are playing it cool, noting in a joint statement that the Phase 2 probe was “an expected next step in the process and in line with the timeframe for completion that we set out from the outset. Vodafone UK and Three UK remain confident that the transaction will deliver significant benefits for competition, customers and the country.”

They reiterated their position that, as sub-scale operators that are “unable to cover their cost of capital, and constrained in their ability to invest and compete effectively against the two market leaders… customers and businesses are missing out on the benefits offered by enhanced digital connectivity… the merger will create a third mobile network operator with scale, able and incentivised to invest fully in a best-in-class network. Millions of customers across the UK will benefit from day one, thanks to a step-change in network quality, speed, and coverage. A combined network would also boost competition in the wholesale market, by offering greater choice to MVNOs, the fastest-growing segment of the UK’s mobile industry,” the operators claimed. 

Vodafone UK CEO, Ahmed Essam, noted: “By merging our two companies, we will be able to invest £11bn to help the UK realise its ambitions to be a world leader in next-generation 5G technology, and increase competition across the industry… This transaction will create an operator with the scale required to take on BT/EE and VMO2, give MVNOs greater choice in the wholesale market and is in the wider interests of customers, competition and the country,” added Essam, who is about to take on a broader role in the Vodafone Group – see Vodafone ‘reshapes’ its Euro footprint with Italian sale.

Three UK CEO Robert Finnegan also focused on the investment potential. “The current market structure is holding the UK back, which is not good for customers or competition. By creating a third player with the necessary scale to invest, the combination of our two companies will deliver one of Europe’s most advanced networks and move the UK into the digital fast lane, benefitting customers from day one,” stated Finnegan

Industry analysts say the CMA’s move was widely anticipated and that the focus will be on the potential merger’s direct impact on UK mobile users.

“One of the CMA’s biggest concerns will be the threat of higher prices. In the coming days, Vodafone and Three plan to raise the cost of many contracts by 7.9%, an ill-timed move that may not sit well with the competition watchdog,” noted CCS Insight’s director of consumer and connectivity, Kester Mann. “Vodafone-Three is poised on a regulatory knife-edge, but if both parties are eventually willing to make further concessions – such as divesting assets like mobile spectrum – they should just about get it over the line.  My view remains that the deal should be approved. It is better to have three strong providers than two that are dominant and two that are sub-scale. Blocking it could thwart the long-term development of the UK’s telecom infrastructure,” added Mann. 

Paolo Pescatore, founder of PP Foresight, also expects the operators to “agree to concessions on spectrum and the merged entity will have to provide solutions on areas like network sharing, rather than create another problem. Both parties need to demonstrate that this is genuinely in the interest of UK plc, the economy and consumers for it to have a chance of getting over the line,” added the analyst, who also believes the merger is in the best interests of the UK market. 

“A marriage of convenience makes sense. It would create a mobile champion that could increase competition in the wholesale segment of the market and become a partner of choice for MVNOs. Scale is key to help lower costs and improve margins. It could take years before we see the real fruits of this deal, if it goes ahead. The question is, can the UK wait that long?” questions Pescatore.

The first wait, though, is for the Phase 2 process to run its course: Should it be initiated, as looks likely, it will take 24 weeks, which means a ruling will not be forthcoming until at least September. 

- Ray Le Maistre, Editorial Director, TelecomTV