Vodafone and the owner of Three UK are in talks about a potential mega-merger that would create Britain’s biggest mobile operator.
Vodafone and CK Hutchison, the parent company of Three UK, have long been considered potential merger candidates after a wave of consolidation in the UK and European telecoms sectors in recent years.
“Vodafone confirms that it is in discussions with CK Hutchison Holdings in relation to a possible combination of Vodafone UK and Three UK,” the company said in a statement. “The envisaged transaction would involve both companies combining their UK businesses, with Vodafone owning 51% and our partner CK Hutchison owning 49% of the combined business.”
The first admission of talks between the two companies follow the French telecoms billionaire Xavier Niel and the Swedish activist investor Cevian taking stakes in Vodafone, where shares have more than halved since 2018. Shares were up 2% on Monday.
Hong Kong-based Hutchison has been exploring a sale, having failed to grow Three UK, which launched more than two decades ago, to the scale of the biggest players Vodafone, EE and O2.
In February, Nick Read, the chief executive of Vodafone, said he had entered talks with rivals in its biggest markets to strike deals with “speed and resolve”, arguing that the European telecoms industry must consolidate to create more profitable businesses that are more attractive to investors.
Vodafone said a deal to create a new telecoms group – Vodafone UK and Three UK would be the largest mobile operator by customer numbers – is necessary given the huge costs of rolling out and maintaining new 5G networks.
“The conditions to ensure thriving competition in the market need to be nurtured, otherwise the UK is at risk of losing the opportunity to be a 5G leader,” Vodafone said. “As Ofcom has identified, some operators in the UK – Vodafone UK and Three UK – lack the necessary scale to earn their cost of capital. 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.”
The merger would be subject to an in-depth investigation by the Competition and Markets Authority. However, Vodafone pointed out that BT bought the mobile operator EE in 2015 while Virgin Media and O2 merged in 2020.
“The merged business would challenge the two already consolidated players for all UK customers and bring benefits through competitively priced access to a third reliable, high quality, and secure 5G network throughout the UK,” Vodafone said.
In February, Ofcom, the UK telecoms regulator, paved the way for a potential Vodafone-Three deal by dropping its long-held belief that a merger between any of the UK’s big four mobile operators should be blocked at all costs.
Ofcom changed its stance, saying that any potential merger would be “informed by the specific circumstances of that particular merger, rather than just the number of competitors”.
The regulator has previously explicitly stated in its annual plans that the UK market needs four leading mobile players to operate efficiently.
The UK’s four biggest operators are O2, which is part of Virgin Media O2, with 34 million customers; BT-owned EE, which has 26 million; Vodafone UK at 18 million; and Three UK with 9.3 million.