The UK telecoms industry will receive its biggest shake-up in years after the country’s competition regulator on Thursday approved the £16.5bn merger of Vodafone’s domestic business with CK Hutchison’s Three UK. The move from four to three mobile operators marks a milestone for the sector.
The Competition and Markets Authority said the deal, first announced last year, should be allowed to proceed if the companies sign binding commitments to invest billions of pounds to roll out a combined 5G network across the UK and agree to shorter-term customer protections.
Kester Mann, director of consumer and connectivity at CCS Insight, said the “megamerger marks one of the most significant moments in the history of UK mobile, heralding the arrival of a new market leader with a combined 29mn customers”.
Which remedies have been agreed?
The legally binding commitments set out by the CMA require a joint network upgrade to be delivered over the next eight years. The companies must also cap the prices of some mobile tariffs and data plans, and offer preset prices and contract terms for wholesale services, for three years.
Vodafone and Three UK’s £11bn network investment commitment will be overseen by the watchdog and UK communications regulator Ofcom.
The CMA’s acceptance of behavioural remedies marked a departure from its traditional approach that would have required companies to offload assets before a deal was approved.
Michael Grenfell, antitrust partner at law firm Clifford Chance, said the decision indicated “a shift to a more pragmatic approach where appropriate” and that businesses contemplating merger and acquisition activity could have more hope about their prospects and “be imaginative and creative about remedies that might satisfy the CMA”.
He added that a “four-to-three” merger of British mobile operators would have been unlikely a few years ago.
The CMA will hold a review next year into whether it should more frequently use such behavioural remedies when approving deals.
Tom Smith, competition lawyer at Geradin Partners and a former CMA legal director, said the situation was “more complex than a blanket softening of the CMA’s stance” and that behavioural remedies would “always be quite rare”.
What does the merger mean for consumers and rivals?
Consumer group Which? said it was still concerned the merger of the two competitors “could lead to higher prices and lower quality for consumers”.
BT had previously expressed opposition to the tie-up while the other UK mobile network operator Virgin Media O2 has been more supportive.
Virgin Media O2, which itself was created after a 2021 merger, and Vodafone UK in July announced that they had agreed a new long-term network-sharing deal — which had also been a previous area of concern for the CMA — and that Virgin Media O2 would acquire spectrum from the merged company upon approval.
Another of the legally binding commitments that the combined Vodafone-Three domestic business will be subject to is to ensure that mobile virtual network providers, which do not have their own networks, “can obtain competitive terms and conditions” as the combined network is rolled out.
Sky — one of the biggest MVNOs in the UK — said last month, in a supplementary response to the proposed wholesale remedies, that it would be “forced to consider appealing [against] the decision” if the regulator did not make several improvements. The company declined to provide an update after the latest decision.
Matthew Howett, founder and chief executive of Assembly Research, said that a successful appeal “would be hard-fought, expensive and face a high bar”.
He expected “positive implications overall” for wholesale customers, consumers and businesses.
What will the combined company look like?
Under the terms of the deal, Vodafone will own 51 per cent of the combined business and CK Hutchison 49 per cent. Vodafone has the option to acquire the remaining stake three years after completion if the merged entity reaches an enterprise value of £16.5bn, which it is expected to take up.
Max Taylor, chief executive of Vodafone UK, who will also head up the new combined business, told the Financial Times it would “deliver the biggest, fastest and best network the UK has ever seen”. Three UK chief financial officer Darren Purkis will take on the same role at the merged company.
CCS Insight’s Mann said the merged group’s biggest task would be to “combine two established mobile networks with a complex assortment of network suppliers” while making “difficult decisions in areas such as brand, retail, jobs and market positioning”.
Robert Finnegan, chief executive of Three UK, on a media call on Thursday acknowledged there would be a “duplication of roles within the two companies” but said his group would have also had to make redundancies if the deal had not gone through as the CK Hutchison-owned business was cash flow negative.
He added that the deal was “about job creation overall” as it was expected to result in new roles in the wider economy.
Could the move be a positive signal for further telecoms consolidation in Europe?
The CMA’s decision was closely watched by the industry. It is also expected to have an impact on the European Commission, according to Geradin Partners’ Smith.
Regulators in Brussels in 2016 blocked CK Hutchison’s attempt to buy O2 from Spain’s Telefónica citing “strong concerns” that it would have led to higher prices and less choice for UK consumers.
Howett said this was one of 10 attempts at large domestic telecoms deals in Europe since 2010. The majority were approved but often with structural commitments that “undermined the rationale for the mergers”. He added that operators on the continent would “have to wait to see” in terms of any revised approach to competition policy after calls from executives across the sector to be allowed to scale via consolidation.
