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It’s official: Vodafone and Three to tie the knot in the UK

Smile and say '5G' – CK Hutch and Voda group couple up in MergeCo

The long-rumored merger between Vodafone and Three in the UK is finally on. The two have agreed to invest £11 billion ($13.9 billion) in the country's 5G infrastructure over the next 10 years as part of the deal, and claim that combining operations will deliver greater competition in the market.

Vodafone and Three UK were reported to be in merger talks since at least last October, but now Vodafone Group and Three owner CK Hutchison Group have announced a binding agreement to combine their UK operations, with Voda owning 51 percent of the resulting company and Hutchison 49 percent.

The merger is expected to create a third telecoms operator in Britain with the scale to be able to compete against BT and Virgin Media O2, which have already swallowed other mobile operators. The resulting company has yet to have an official name, and is currently referred to as "MergeCo."

Voda and Three have given an undertaking that the combined business will invest £11 billion ($13.9 billion) over 10 years to create "one of Europe's most advanced standalone 5G networks," and claimed the merger will deliver up to £5 billion per year ($6.32 billion) in economic benefit by 2030.

In a statement, Vodafone Group chief executive Margherita Della Valle hailed the move as "great for customers, great for the country and great for competition," and said the UK will benefit from the creation of a competitive third operator to drive growth, employment and innovation.

CK Hutchison Group co-managing director Canning Fok said the announcement is a milestone, and conceded that "Three UK and Vodafone UK currently lack the necessary scale on their own to earn their cost of capital." However, post-merger "we will have the scale needed to deliver a best-in-class 5G network for the UK," he added.

Kester Mann, director of Consumer and Connectivity at CCS Insight agreed on that point, telling us the deal makes plenty of sense as both providers are sub-scale on their own.

"As separate entities, it would have been near impossible for either to grow enough organically to come close to challenging BT or Virgin Media O2 for size. Inevitably however, there will be widespread fears over job cuts," he added.

Indeed. Vodafone says the merger "is expected to result in substantial efficiencies" that are expected to amount to "more than £700 million of annual cost and capex synergies."

Mann also cautioned the deal will face a major challenge to win approval from the UK's competition watchdog.

"The prospect that the deal might lead to higher prices will be a major concern for the Competition and Markets Authority (CMA)," he said, adding that "Vodafone and Three may have shot themselves in the foot here by recently hiking their tariffs by up to 14.4 percent."

PP Foresight telecoms analyst Paolo Pescatore said the merger will be a hard sell for regulators, and both parties need to demonstrate the merger is genuinely in the interest of UK plc, the economy, and consumers.

"Ofcom recognises the challenges of the UK mobile market and the need for scale. Convincing the CMA will be the real test," he said, adding that "current investment levels are not sustainable in the longer term," and warning that concessions on wireless spectrum allocations will have to be made.

Vodafone and Three said the combined business will be able to reach more than 99 percent of the UK population with the resulting 5G network, and promised a six-fold increase in average data speeds by 2034. It is also intended to offer fixed wireless access to 82 percent of households by 2030 to complement fiber offerings.

The merger is expected to be complete before the end of 2024, subject to regulatory and shareholder approvals. The current Vodafone UK CEO Ahmed Essam is to become CEO of the combined business with the CFO role taken by Three UK CFO Darren Purkis. ®

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