• This Friday marks one year since the proposed deal was officially announced
• The U.K.’s CMA will be the biggest nut to crack
• Merger remedies seen as likely, and expected to determine the outcome of the deal
This Friday marks the first anniversary of the official announcement by Vodafone Group and CK Hutchison that they intend to merge their respective U.K. telecom businesses into a larger, scaled up operator that could better compete with rivals BT/EE and Virgin Media O2 (VM O2).
A year on, much has happened, but an actual merger of Vodafone UK and Three UK has yet to take place, and still seems very much up in the air. However, despite the hurdles, the deal is still odds-on for approval, says Kester Mann, an analyst with CCS Insight who has been closely following the process.
On the campaign trail
When the two parent groups entered into binding agreements to combine their U.K. telecom assets, Vodafone UK and Three UK embarked on a campaign to persuade government, regulators and the public that a merger would be in everyone’s best interests. As stated at the time by Vodafone Group CEO Margherita Della Valle, the merger would be “great for customers, great for the country and great for competition.”
The two U.K. operators have certainly thrown everything they can at the process, commissioning reports to highlight how a speedier rollout of 5G would boost the National Health Service (NHS), improve the day-to-day lives of the British public, help eliminate the rural digital divide, improve the fortunes of industries and SMEs, and even drive up revenues during rugby matches.
No easy ride
Despite all these efforts, it was only to be expected that the transaction would face rigorous scrutiny by U.K. competition authorities. In April this year, the Competition and Markets Authority (CMA) said it was pressing ahead with plans to refer the proposed merger for a more in-depth investigation after the two operators apparently refused to commit to undertakings that may have eased the regulatory process.
The CMA “was always going to be the toughest nut to crack,” Mann commented.
Indeed, the antitrust regulator recently paused the phase two investigation for 24 days to allow CK Hutchison to submit certain documents, pushing the decision date back to at least October 12.
“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,” observed Mann.
Indeed, it is hard to gauge the CMA’s overall position toward Vodafone-Three, or whether it is moving in a more positive or negative direction, he added. “But the narrative in its phase one review suggested significant concerns.” For example, it described both Vodafone UK and Three UK as “viable and competitive businesses” that would “continue to invest in their networks absent the merger.”
“This appears to counter an argument frequently put forward in favor of combining, that both companies are failing to achieve sufficient returns on expensive network rollout,” said Mann. Indeed, on the occasion of its full-year results for 2023, Three UK CEO Robert Finnegan said the operator’s financial performance was “clearly unsustainable despite scaling back our 5G investment.”
Concessions likely
Overall, Mann believes that while the deal faces stern resistance, “with the right concessions, its chances of approval remain good.”
Although Della Valle recently suggested that the deal should be passed without concessions at all, “deep down, 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 are imposed,” Mann said.
Notably, the merger has already been cleared by the U.K. government on national security grounds, although with conditions attached.
Vodafone and Three will certainly be keen to avoid the significant concessions imposed on Orange and Masmovil in Spain, including divesting mobile spectrum to rival provider Digi Communications.
“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, rather than anything more onerous,” Mann said. “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.”