Vodafone and Three confirm merger talks taking place

If the deal goes ahead, it will create the biggest telecoms provider in the UK and could accelerate the rollout of 5G services.

The two companies are hopeful of striking a deal by the end of the year, although there may be regulatory hurdles in the way.

While the recent merger between Virgin Media and O2 was approved by the CMA, Three were previously blocked from merging with O2 back in 2016.

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Merger plans

There have been rumours for some months that Vodafone and Three were in merger talks, with the two providers now confirming those discussions publicly for the first time.

At this stage, we don't know too much about their plans but they have stated that:

• It would create the largest network with 27 million customers
• Vodafone would own 51% of the company while CK Hutchison (Three) would own 49%

In their statement to the market, Vodafone pointed out it was noted by Ofcom in a discussion paper in February 2022 that they were operating at a lower scale than their rivals Virgin Media O2 (VMO2) and EE.

As a combined entity, they say they would be able to match that scale and speed up their 5G rollout across the UK.

If the merger is to go ahead, the two companies hope to strike a deal by the end of 2022.

Market consolidation

It isn't the first time Three have been linked with another provider in merger talks.

There were long-running discussions about a potential Three and O2 merger that began in 2013 and were finally scuppered in 2016 when the European Commission agreed with Ofcom and the Competition and Markets Authority (CMA) that the proposed deal would reduce customer choice and increase prices.

Arguably, the regulatory landscape has shifted since then, with the CMA approving the merger of Virgin Media and O2 in 2021 that led to the creation of a huge broadband and mobile giant to rival BT and EE (who merged themselves a few years earlier).

Yet the situations are not identical and there is no guarantee than the CMA will look favourably on these plans.

While Virgin Media and BT were broadband giants merging with mobile giants O2 and EE, Vodafone and Three are primarily active in the mobile sphere.

Vodafone do offer consumer broadband services up to speeds of 900Mb in conjunction with Openreach and CityFibre, but the key point is that they use other providers' infrastructure rather than their own, so they are not bringing any consumer broadband infrastructure to the table.

Expansion of 5G

The statement specifically mentions the benefits of merging the two 5G networks operated by Vodafone and Three, saying it would allow customers access to a third reliable and high quality 5G network alongside those already offered by EE and VMO2.

With 5G deployments taking place across the country, pooling their resources would undoubtedly allow Vodafone and Three to accelerate their rollouts and bring 5G services to communities more rapidly.

However, one of the key questions that Ofcom and the CMA will examine in their responses is whether the proposed deal will lead to higher prices for customers over the longer term.

The two brands are at opposite ends of the market, with Three providing low-cost mobile deals and Vodafone offering a more premium experience.

One of the challenges facing this merger would be where the proposed company would land in terms of value - and whether that value offers enough diversity to the market.

When the Three merger with O2 was on the table, legally binding promises were made to try and allay competition fears. It will be interesting to see whether similar promises are made this time around to help sweeten the deal for regulators.