Vodafone and Three's UK arms locked in merger talks

Regulators might have thing or two to say. And analysts warn of post consolidation price rises

Vodafone has confirmed it is locked in negotiations with CK Hutchison Holding Ltd – the owner of Three UK – over merging the two businesses' operations in Great Britain, creating what would be the largest local telco.

Talks between the pair are understood to be at an advanced stage and a potential agreement is intended to be reached before the year end, though approval by shareholders and regulators will come into play.

"Vodafone confirms that it is in discussions with CK Hutchison Holdings Limited ("CK Hutchison") in relation to a possible combination of Vodafone UK and Three UK," a spokesperson told The Register via email.

The consolidation of the two entities would see Vodafone owning 51 percent of the combined entity and and CK Hutchison the remainder.

"The relative ownership would be achieved through a differential leverage contribution at closing, and no cash consideration will be paid," the telco added via its statement.

Vodafone directed us to a paper published by national communications regulator Ofcom in February in which it said some local operators lack the scale to earn their cost of capital.

"By combining our businesses, Vodafone UK and Three UK will gain the necessary scale to accelerate the rollout of full 5G in the UK and expand broadband connectivity to rural communities and small businesses."

"The merged business would challenge the two already consolidated players for all UK customers ands bring benefits through competitively priced access to third reliable, high quality, and secure 5G network throughout the UK," Vodafone added in its statement.

According to Sky News, CK Hutchison has explored the sale of Three UK for some time, believing that its nine million local customers mean that it is sub-scale in a market requiring meaty cash investments developing network infrastructure.

The combined entity would have circa 27 million customer connections in Britain and control around 46 percent of all mobile spectrum. This compares to Virgin Media O2's 24 million connections and 20 million at EE.

Paolo Pescatore, tech, media and telco analyst at PP Foresight, told us: "Ultimately scale is key and with this in mind a move to merge could make sense. This will be subject to regulatory scrutiny and concessions will need to be made to get this over the line.

"If this were to happen, considering a move to integrate TalkTalk could strengthen their overall position.  The company has a reasonable fixed line base and has now returned to offer TV services. Despite previous failed attempts, both need to do more to sway customers to sign up to both mobile and fixed services.

"However, Vodafone will need to move quickly to avoid losing further ground in the UK and as it has done in other European markets."

Kester Mann, analyst at CCS Insight, agreed:

"In telecommunications, the most successful companies tend to be the largest; bulking up would offer many synergies and cost-saving opportunities. Under the status quo, it's hard to see either operator growing enough organically to get close to challenging BT and Virgin Media O2 for size in the UK.

"Should any deal materialize, regulation would be a major hurdle. It would be up to the competition authorities to decide whether reducing the number of players is for the overall good of the market. Advocates will argue it encourages investment; dissenters will claim it's a reason to push up prices." ®

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