Vodafone, Three Merger To Create UK’s Biggest Mobile Operator

Vodafone UK and the Chinese owner of Three UK (CK Hutchison) have finally agreed the long touted merger of their UK mobile operations.

The agreement between the two parties was announced on Wednesday, with Vodafone’s newly installed chief executive Margherita Della Valle, describing the merger as being “great for customers, great for the country and great for competition.”

The merger has been an open secret for a while now, after talks between the two began last year to create the largest mobile operator in the United Kingdom.

Open secret

It was back in May 2022, when it was first reported by the Financial Times that Vodafone was in talks to merge its UK operations with Three UK.

Both Vodafone and Three declined to comment at the time, but it was noted that if the merger talk resulted in a tie up, it would likely to face significant regulatory scrutiny – not least because of the fact that Three UK is owned by China-based CK Hutchison Holdings.

Spectrum holdings and market competition would also be considered by regulators, but national security concerns over Chinese companies are currently a leading concern for many Western governments.

Vodafone will end up owning 51 percent of the combined business, leaving CK Hutchison the minority stake of 49 percent.

Reports of a merger between the two came after Vodafone’s then chief executive Nick Read said in February 2022 the operator was pursuing mergers with rivals in multiple European markets, spurred on by more favourable signals from regulators who have realised the value of network investment during the Covid-19 pandemic.

Vodafone was (at one stage) the world’s biggest mobile operator (in terms of revenue), before it sold off its hugely valuable 45 percent stake in Verizon Wireless in the United States.

But it has struggled in its traditional strongholds of Europe, amid intense competition, difficult regulatory environments and falling legacy revenue.

The UK is especially competitive, with four big name operators, EE, O2 (now Virgin Media O2), Vodafone and Three UK going head to head in the market.

In October 2022 Vodafone officially confirmed it was in talks with Three UK over a possible merger.

‘Great for customers’

After finally confirming the merger, both Vodafone and Three UK were keen to talk up the benefits of the deal, which still has to be approved by the UK’s increasingly powerful regulator, the CMA (which recently blocked Microsoft’s $69 billion acquisition of Activision Blizzard).

Both operators said the deal will benefit millions of customers of Vodafone UK and Three UK, allowing them to “enjoy a better network experience with greater coverage and reliability at no extra cost, including through certain flexible, contract-free offers with no annual price increases, and social tariffs.”

The merged entity will reach more than 99 percent of the UK population; and the combined business “will invest £11 billion in the UK over ten years to create one of Europe’s most advanced standalone 5G networks, in full support of UK Government targets.”

Both parties said the Transaction is expected to result in substantial efficiencies (aka job losses, store closures etc), and these are expected to amount to more than £700 million of annual cost and capex synergies by the fifth full year post-completion.

The current CEO of Vodafone UK, Ahmed Essam will become CEO of the combined entity, while current Three UK CFO Darren Purkis will take the role of CFO.

The transaction is expected to close before the end of 2024, subject to regulatory and shareholder approvals.

“The merger is great for customers, great for the country and great for competition. It’s transformative as it will create a best-in-class – indeed best in Europe – 5G network, offering customers a superior experience,” said Margherita Della Valle, Vodafone Group chief executive.

“As a country, the UK will benefit from the creation of a sustainable, strongly competitive third scaled operator – with a clear £11 billion network investment plan – driving growth, employment and innovation,” said Della Valle. “For Vodafone, this transaction is a game changer in our home market. This is a vote of confidence in the UK and its ambitions to be a centre for future technology.”

“Today’s announcement is a major milestone for CK Hutchison and for the UK,” said Canning Fok, Group co-Managing Director of CK Hutchison. “Three UK and Vodafone UK currently lack the necessary scale on their own to earn their cost of capital. This has long been a challenge for Three UK’s ability to invest and compete.”

“Together, we will have the scale needed to deliver a best-in-class 5G network for the UK, transforming mobile services for our customers and opening up new opportunities for businesses across the length and breadth of the UK,” said Fok. “This will unlock significant value for CK Hutchison and its shareholders, realise material synergies, reduce net financial indebtedness and further strengthen its financial profile.”

“The combination of Vodafone UK and Three UK will bring more choice and better value to customers nationwide,” added Vodafone UK CEO Ahmed Essam.

“With scale to invest, we will create a best-in-class 5G network, supporting the Government’s 5G ambitions, drive digital transformation and create jobs,” said Essam. “Through converged offers we will really challenge the two largest operators and, of course, we will continue to support the most vulnerable in society with our social tariffs and our commitment to help 6 million people cross the digital divide by 2025.”

UK consolidation

There has been some notable consolidation in the UK mobile market over the past decade, and it can be fair to say that Vodafone and Three had been lagging behind larger rivals EE and O2.

Both Vodafone and Three UK said this merger will “create a third operator with scale, levelling the competitive playing field, increasing competition to the UK’s two leading converged operators and will also provide more choice in wholesale partners for the UK’s already competitive MVNOs.”

EE it should be remembered, was itself a merger between T-Mobile and France Telecom’s acquired and then spun out again ‘Orange’ mobile operation.

EE was acquired by former UK telecoms incumbent BT Group in January 2016, uniting the UK’s biggest fixed line and mobile providers.

Three UK meanwhile had also sought to merge with rival operator O2 back in 2016, with a £10.25 billion deal for O2.

That deal however was blocked by regulators in May 2016, after both the UK Competitions and Markets Authority (CMA) and Ofcom, as well as the EC opposed the transaction.

That tie up was blocked after none of the remedies offered satisfied “serious” concerns about the impact on the mobile sector at the time.

But four years later in 2020, regulators overturned that decision, after O2 merged with Virgin Media in 2021, in a move that combined Virgin Media’s broadband, TV, mobile and landline services with the mobile operations of O2.

Meanwhile Vodafone last month announced it is cutting 11,000 jobs in order to “simplify our organisation, cutting out complexity to regain our competitiveness.”