Vodafone and Three merger announcement imminent – Reuters

A long-touted merger between Vodafone and Three UK owner Hutchison may be imminent, according to three sources cited by a Reuters report this morning, with an announcement expected early next week at the latest. Pending regulatory approval – which is far from a foregone conclusion – this might put the UK on a trajectory to having only three mobile network operators.

Light Reading reached out to Vodafone and Three for comment, but had not heard back at the time of publication.

The merger would spawn the UK's biggest operator, jointly owned by the two companies. Vodafone would hold a 51% stake in the new entity, while Hutchison would own 49%, according to the Reuters report, which puts the value of the deal at about £15 billion (US$18.7 billion). No cash is expected to change hands; both companies would instead adjust debt ownership.

Few will be taken aback by the news, given Vodafone confirmed it was in talks with Hutchison in March after months of rumors. Fewer still may be surprised by the reasons for a deal.

The intensely competitive nature of the UK's four-operator market, stagnating sales and high capex-to-sales ratios have created an environment where operators struggle to recoup their cost of capital. In fact, neither Three nor Vodafone has been able to cover its cost of capital since 2018, as per an April report by the Department for Science, Innovation and Technology (DSIT).

This chimes with what the operators have been saying. In March, Three CFO Darren Purkis told Light Reading that the high levels of capital expenditure required to build networks are unsustainable in the current environment.

The ghost of mergers past

The UK government, meanwhile, is keen to spur investment in 5G – especially the newer standalone variant of the technology – which suggests authorities will look favorably on the merger. It is, however, not DSIT but the Competition and Markets Authority (CMA), an independent non-ministerial department, that will have the final say.

And there is precedent for saying no. In 2016, Hutchinson was seeking a merger with the Telefónica-owned O2. That deal which was ultimately blocked after stiff opposition from the European Commission (EC), which back then still had jurisdiction over the UK market. In a stern dismissal, it argued "the significantly reduced competition in the market would likely have resulted in higher prices for mobile services in the UK and less choice for consumers than without the deal."

But times have changed since. For one, the UK has freed itself from what the ruling Conservative Party would call the EU "shackles," and what others would call economic prosperity and consumer protections. And even the General Court of the European Union has ruled that blocking the Three/O2 deal was likely a mistake.

Yet it is hard to argue against some of the EC's earlier logic. Vodafone and Three's merger may well lead to higher prices in the long run, and the timing is far from auspicious. The UK is struggling with a historic cost-of-living crisis, and growing numbers of people are already struggling to heat their homes and put food on the table. Paying more for connectivity – which is becoming more vital by the day in all areas of life – will be tough.

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— Tereza Krásová, Associate Editor, Light Reading