U.K. kicks off regulatory process for Vodafone, Three UK merger

Four months after Vodafone Group and CK Hutchison sealed the deal on a long-awaited Vodafone UK and Three UK merger, the regulatory process has whirred into action, starting with a fact-finding mission to gauge views from “interested third parties” on the proposed transaction.

As a quick reminder, the two groups want to combine their U.K. operations and create what would be the country’s largest telecom operator with over 27 million subscribers. Vodafone and Three are the U.K.’s third and fourth largest operators, respectively, and a merger would overtake BT’s EE and Virgin Media O2, which is owned by Telefonica and Liberty Global.

It was inevitable that the deal would receive scrutiny from regulators. Britain’s Competition and Markets Authority (CMA) has now kicked off proceedings by inviting “interested third parties to comment on the impact that the merger could have on competition in the U.K., in advance of launching a formal investigation once it has received the information it needs from the merging companies.”

Comments should be submitted by November 1, after which the CMA can start a formal Phase 1 investigation, potentially followed by a more in-depth Phase 2 merger investigation. The whole process could take several months.

As noted by Kester Mann, an analyst at CCS Insight, the expected announcement from the CMA “finally sets the wheels in motion for a lengthy investigation into a merger deal that would permanently reshape the U.K. mobile market.”

Deal on a knife edge

Sarah Cardell, CEO of the CMA, has already made it clear that the authority will be considering how the deal may impact pricing and competition in the U.K., “and how it may affect incentives to invest in the quality of U.K. mobile networks.”

Mann commented that consumer pricing will be a major part of the investigation and said the cost-of-living crisis thrusts this further under the microscope.

“Along with most U.K. providers, Vodafone and Three raised tariffs by 14.4% earlier this year, an unfortunately timed move that may be looked upon unfavorably by the CMA. The merger announcement said little about pricing, so it appears that the current inflation-linked mechanism will remain in place if the deal closes,” he said.

British trade union Unite has already called the merger “reckless” and raised worries that the deal would lead to higher phone bills and more job cuts. In May, Vodafone announced its intention to cut 11,000 jobs globally as part of transformation plans unveiled by new Group CEO Margherita Della Valle.

At this early stage, the likely outcome of any investigation is too difficult to call either way. Mann said the deal “appears poised on a knife edge”, and observed that should it be blocked, Vodafone and Three would be left with “highly uncertain futures” in the competitive U.K. market.

As Mann remarked, a leading factor in the eventual outcome will likely be to what extent the merged company is prepared to offer remedies and concessions. “This may well go beyond divesting some of the huge spectrum portfolio the combined company would acquire,” he said.

Vodafone and Three have already been lobbying intensively to secure a favorable outcome, and this looks set to continue over the next 12 months. A central argument, as also outlined by Andrea Dona, chief network officer with Vodafone UK, in an interview with Bloomberg Radio in July, is that the deal will in fact boost competition by merging two subscale operators to create a large-scale player.

“If we actually look at the details of the U.K. mobile market in its current format, the reality is it’s dominated by two large players, which are crowding out the two smaller network owners like ourselves,” Dona said.

“It’s not a four-player market today,” he added, “but an emerging duopoly with two very big converged players, BT/EE and VMO2. We see this deal as taking the market from a two dominant-player market, and creating a very serious converged competitive, both mobile and broadband to take on the emerging duopoly.”

When quizzed about concerns relating to Three UK’s Hong Kong ownership, Dona emphasized the adherence to a “fundamental principle that we thoroughly protect all customer data with very strict security protocols.”

He also noted that CK Hutchison will own 49% of the merged entity, while today it currently owns 100% of Three UK. “I don’t see any issues at all, in terms of security with regards to this deal going forward,” he said.