By Leah Montebello
Vodafone confirmed it was in merger talks with Three UK this morning, paving the way for the pair to become the largest mobile telecoms supplier in Britain.
The FTSE 100 firm said it was in discussions with CK Hutchison, the Hong-Kong conglomerate behind Three UK, which could lead to a combination of the two UK business arms, with Vodafone owning 51 per cent and CK Hutchison owning 49 per cent.
“By combining our businesses, Vodafone UK and Three UK will gain the necessary scale to be able to accelerate the rollout of full 5G in the UK and expand broadband connectivity to rural communities and small businesses,” Vodafone said in an update this morning.
It is understood that Vodafone and CK Hutchison are looking to ink a deal by the end of the year, as reported by Mark Kleinman for Sky News.
Insiders said that talks were at a “relatively advanced” stage, but there were still hurdles ahead, including potential challenges from the UK competition watchdog.
However, analyst at CCS Insight Kester Mann said the sentiment toward deals “could finally be shifting” compared to the landscape back in 2016 when the European Commission’s competition authority blocked the deal.
“Many in the industry are pinning hopes on a more sympathetic stance after operators more than proved their worth in the pandemic,” he said, adding that telecoms firms’ increasingly critical role in national infrastructure has also caused this tide to shift.
The media regulator Ofcom recently clarified its position on mergers, saying it would review any deal on its individual merits, rather than the potential for reducing the number of competitors, setting further tongues wagging about potential mergers. However, Mann was keen to emphasise that “the devil was in the detail” on this one.
Talk of a potential tie-up has swirled around for a while now, withCity A.M. reporting earlier this year that the third and fourth largest mobile network operators in the country were discussing a deal.
Telecoms expert at Enders Analysis Karen Egan previously told City A.M. at the time that scale is crucial for mobile operators trying to make a return, and “sub-scalers”, like Vodafone and Three, are finding this increasingly difficult.
Commenting on the potential deal, TMT analyst at PP Foresight Paolo Pescatore said: “Remaining players including TalkTalk, Three and Vodafone are all in a challenging position given the growing importance of convergence.
While Vodafone is addressing this through wholesale agreements in the fixed line market, it is unclear whether a merger with Three UK is the silver bullet.”
He said the deal certainly makes sense for Three UK, which has a mobile only position.
Mann also said that whilst a tie-up between Vodafone and Three would have felt like an “unnatural pairing”, “in recent times, Vodafone has taken on more of a challenger role in its home market, so the two operators’ strategies may no longer be too far apart”.
Vodafone has been under increasing strain to speed up its organisational overhaul after it was revealed earlier this year that a notorious activist investor Cevian had taken a stake in the firm.
Despite Vodafone’s recent rejection of Italy’s Iliad and private equity titan Apax Partners’ takeover approach, it is understood that Cevian are keen for the UK firm to pursue consolidation in key markets.
While Three UK declined to comment, chief Robert Finnegan signalled towards market consolidation back in March after the mobile giant reported humble revenue growth, despite hitting its strongest contract boom since 2012.
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