'Lukewarm' market response to Vodafone and Three UK merger talks

Vodafone and the owner of Three UK, CK Hutchison, have confirmed a Sky News story that they are hopeful of striking an agreement by the end of the year to establish a joint venture to create a market leading mobile network.

Sky News City editor Mark Kleinman reported discussions between Britain’s third and fourth largest networks respectively had intensified in recent weeks after a period in which they were thought to have stalled.

CK Hutchison, the multinational conglomerate, said on Monday afternoon that no legally binding agreement for such a combination has been entered into but it is envisaged that the transaction would involve both companies combining their UK business.

It added there was no certainty as to whether any transaction with Vodafone will eventually take place.

Vodafone said on Monday that CK Hutchinson would own 49% of the venture and Vodafone would own a majority 51% stake, which would be achieved by adjusting ownership of debt instead of exchanging cash.

Kleinman had reported conglomerate was exploring a sale of Three UK for some time, having concluded that its operation – which has nine million customers – was sub-scale in a sector that carries huge capital investment requirements for developing network infrastructure.

It is said to have decided that a deal with Vodafone represents its best opportunity to help it play a role in market consolidation, with Vodafone’s chief executive, Nick Read, under pressure from shareholders to revive its flagging share price.

A merged mobile network could be a market leader and accelerate the roll-out of 5G services and expand broadband availability, CK Hutchinson said.

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The merged network would create a business with about 27 million customer connections.

That would be bigger than Virgin Media O2, which boasted 24 million retail connections in July, and EE, which is owned by BT Group and has about 20 million customers.

“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,” Vodafone said in an update to shareholders.

Insiders had said on Monday that discussions between the two companies were now at a “relatively advanced” stage, though several significant hurdles remained, including the regulatory scrutiny a deal would face from telecoms industry regulator, Ofcom, and the Competition and Markets Authority (CMA).

Industry sources had said it was “almost certain” that the CMA would want to launch a full-blown, or Phase-II, merger inquiry.

“The response to the confirmation of recent merger discussions was lukewarm”, said Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, “with the shares up 1.6% by lunchtime but down 3.8% on a five day view”.

“This may be due to the significant regulatory hurdles ahead for the deal, as the authorities weigh up the potential ceding ownership of more core UK infrastructure to an overseas owner, but also perhaps the terms, with some analysis suggesting that Vodafone’s market share is almost double that of Three’s.”

She added: “This development follows a defined trend of mega mergers in the sector with only four major operators still remaining. Those left are already collaborating in areas such as remote rural areas where cost synergies are required given the low population density.”

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