For Vodafone and Three, there’s light at the end of the M&A tunnel

• The UK’s Competition and Markets Authority (CMA) has provided an update on the proposed merger of mobile operators Vodafone UK and Three
• Its main concerns are that the merger will lead to price rises and not necessarily to significant investment by the merger entity
• But the regulator is to explore ‘potential solutions’ to its concerns
• The operators ‘disagree’ with the CMA’s findings and will work with the competition watchdog to find remedies 
• Industry analysts believe the CMA’s open stance will lead to the ultimate approval of the merger

The UK’s Competition and Markets Authority (CMA) has provided an update about its investigation into the proposed £16.5bn merger of mobile operators Vodafone UK and Three, highlighting grave concerns that such consolidation will lead to “tens of millions of customers having to pay more” and that the claims by the operators of promised investments and improved service quality might be  “overstated”. 

But that doesn’t mean the telco duo’s hopes of combining have been dashed: The CMA’s statement suggests that solutions can be found, the two operators say they will work with the regulator to “secure approval” and industry analysts and commentators expect the deal to ultimately be conditionally approved. (More on that later.)

The CMA’s update, issued early on Friday, noted that the regulator’s in-depth investigation identified competition concerns and “provisionally concluded that the merger would lead to price increases for tens of millions of mobile customers, or see customers get a reduced service, such as smaller data packages in their contracts. The CMA has particular concerns that higher bills or reduced services would negatively affect those customers least able to afford mobile services, as well as those who might have to pay more for improvements in network quality they do not value.”

In addition, the CMA believes “the merger would negatively impact ‘wholesale’ telecoms customers – mobile virtual network operators (MVNOs), such as Lyca Mobile, Sky Mobile and Lebara – which rely on the existing network operators to provide their own mobile services. The merger would reduce the number of network operators from four to three, making it more difficult for MVNOs to secure competitive terms, restricting their ability to offer the best deals to retail customers.”

The regulator also noted that while a post-merger integration of the Vodafone UK and Three networks “could improve the quality of mobile networks and bring forward the deployment of next-generation 5G networks and services, as claimed by Vodafone and Three,” it “currently considers that these claims are overstated, and that the merged firm would not necessarily have the incentive to follow through on its proposed investment programme after the merger. As a result, the CMA has provisionally concluded that the merger would lead to a substantial lessening of competition in the UK – in both retail and wholesale mobile markets.” 

The operators have promised to invest £11bn in a nationwide combined network. 

The regulator will now consult on these findings and on “potential solutions to its competition concerns, including the options set out in its remedies notice. These include legally binding investment commitments overseen by the sector regulator, and measures to protect both retail customers and customers in the wholesale market. The CMA will retain the option to prohibit the merger should it conclude that other remedy options will not address its competition concerns effectively.” 

Stuart McIntosh, chair of the inquiry group leading the CMA’s investigation, stated: “We’ve taken a thorough, considered approach to investigating this merger, weighing up the investment the companies say they will make in enhancing network quality and boosting 5G connectivity against the significant costs to customers and rival virtual networks. We will now consider how Vodafone and Three might address our concerns about the likely impact of the merger on retail and wholesale customers while securing the potential longer-term benefits of the merger, including by guaranteeing future network investments.”

The CMA will accept responses to its possible remedies by 27 September and to its provisional findings by 4 October, and plans to issue its final report by 7 December 2024.

Vodafone UK and Three issued a response to the CMA’s findings to say they “disagree with a number of elements” in the provisional findings. “We will continue to positively engage with the CMA and look to resolve outstanding matters,” they noted in this announcement. 

Three UK CEO Robert Finnegan stated: “The current UK four-player mobile market is dysfunctional and lacks quality competition with two strong players [BT’s EE and Virgin Media O2] and two weak players [Vodafone UK and Three]. This is reflected in the current state of the UK’s digital infrastructure that everyone agrees falls well short of what the country needs and deserves. We are determined to reassure the CMA in relation to their provisional concerns and work with them to secure the extensive benefits this merger brings for UK customers, businesses and wider society.”

Vodafone Group CEO Margherita Della Valle added that the “merger is a catalyst for change. It’s time to take off the handbrake on the country’s connectivity and build the world-class infrastructure the country deserves. We are offering a self-funded plan to propel economic growth and address the UK’s digital divide.”

Light at the end of the M&A tunnel

So where does this leave Vodafone and Three? Perhaps not in as bad a position as it might seem, reckons Kester Mann, director of consumer and connectivity at industry research firm CCS Insight. 

“At first glance, the CMA’s concerns make for uncomfortable reading for Vodafone and Three as they battle for approval for their crucial merger,” he notes in comments shared with the media. “However, many of these had been outlined previously, notably the potential for higher prices and likely impact on the wholesale market. The main knockback to the merging parties is that the CMA considers claims of superior network quality post integration to be ‘overstated’.” 

The analyst continues: “The CMA offers a potential path to approval through a range of remedies. Crucially, it appears willing to consider ‘behavioural remedies’, such as enhanced network access for virtual providers or safeguards for retail customers. This is significant as many had feared that more onerous ‘structural remedies’ – such as selling assets or supporting a new entrant – would be required. In this sense, Vodafone and Three should be encouraged by the tone of the CMA’s report, which appears more open to the merger than I was expecting.”

He concludes: “The ball is now firmly back in the court of Vodafone and Three. They need to quickly assess these proposals and make further suggestions ahead of a final deadline in early December. The next three months may prove to be the most pivotal in the history of the UK telecom sector. I retain my view that approving the merger would be the best outcome for the future of 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.” 

PP Foresight founder and analyst Paolo Pescatore also spies some silver linings. 

“The CMA's findings on the Vodafone UK/Three merger do signal a potential pathway, importantly through behavioural rather than any structural remedies over and above the £11bn network investment commitment to be enforced by the regulator. As expected, the CMA focuses primarily on pricing implications for consumers, but focusing only on price ignores the fact that the merger will bring much needed investment across the UK. Even if the price increase is to be believed, which the companies dispute, it's pence per month and doesn’t in any way outweigh the benefits of building the network the country deserves,” notes Pescatore. 

“To date, both parties are demonstrating that this is genuinely in the interest of UK plc, the economy, and users, which paves the way for a far stronger three-player market than the current imbalance," concluded the analyst.

And Dario Betti, CEO of industry trade body the MEF (Mobile Ecosystem Forum), is even more confident of a merger green light from the CMA.  

“The merger between Vodafone UK and Three will happen, but not in 2024… [the regulator’s update] was not a halt by the CMA but a series of change requests which, while expected, will push the deal into next year… The CMA’s cautious stance is understandable. It faces a tough choice: Balancing the need for lower prices with the necessity of increasing investment in the telecom industry. This decision reflects a broader question: Should telecom services be treated as utility services like water, electricity and gas, where government oversight limits prices but stifles innovation? Or should the industry operate as a free market, where businesses innovate, set prices, and consolidate freely?” asked Betti.

We should have a clearer idea by 7 December. 

- Ray Le Maistre, Editorial Director, TelecomTV