Vodafone (VOD.L) and the owner of Three have announced an agreement to join forces, in a deal that is set to create one of the largest 5G networks in Europe.
The multi-billion pound merger will see Vodafone owning the majority of the business on 51% equity, with Hong Kong-headquartered CK Hutchison (0001.HK) owning the remaining 49%.
Margherita Della Valle, chief executive of Vodafone, criticized the move on Wednesday, calling it a “game changer”.
“The merger is great for customers, great for the country and great for competition. It’s transformative as it will create a best-in-class – indeed the best-in-Europe – 5G network, offering customers a superior experience,” she said.
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What does merger mean?
If successful, the merged company will create the biggest mobile phone network in the UK, set to reach more than 99% of Britain with their 5G standalone network.
The deal, subject to regulatory and shareholder approval, is expected to be completed before the end of 2024. It is not yet clear what the new company will be called, or if it will affect current employees.
In addition to this, no cash is involved in the agreement as the two parties are contributing different amounts of debt to the merged company.
How will this affect customers?
The firms will have a combined 27 million customers if the deal gets the green light. Vodafone said that “with a clear £11bn ($13.96) network investment plan”, the deal will drive growth, employment and innovation.
It added that it would immediately lead to a “better network experience with greater coverage and reliability at no extra cost, including through certain flexible, contract-free offers with no annual price increases, and social tariffs”.
However, some analysts have raised concerns that by reducing the number of operators in the market, prices are at risk of increasing, as well as quality of service.
“A good mobile connection is essential to everyday modern life and this merger between Vodafone and Three will have a significant impact on the telecoms market,” Rocio Concha, Which? director of policy and advocacy, said.
“There are currently four mobile network operators in the UK – EE, O2, Three and Vodafone – which are smaller mobile providers then piggyback off. Reducing the number of network providers from four to three risks reducing the choices available to consumers, raising prices and lowering the quality of services available.
“The CMA needs to conduct a thorough assessment to determine whether this merger will be harmful to consumers.”
Both Vodafone and Three have recently increased their prices above inflation to counteract rising costs.
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Why are they merging?
Investors have fallen out of favor with Vodafone with shares down 40% over the past 12 months as it fights off rising inflation and competition across Europe.
Victoria Scholar, head of investment at interactive investor, said: “The FTSE 100 telecoms business has been grappling with intense competition in Europe’s largest economy, Germany where subscribers are falling, and services revenue is under pressure. It has also been having a tough time in Spain and Italy where mobile phone competition is fierce.
“On top of that, like many businesses, Vodafone has been facing pressures from inflation, particularly energy bills which are driving up costs and making profitability more of a challenge. As a result, Vodafone has been targeted by activist investors such as French telecoms billionaire Xavier Niel who has been arguing for consolidation.
“Perhaps this deal could reinvigorate Vodafone’s bull case amid hopes that the combined entity will benefit from its increased force in the sector and economies of scale to fend off competition.”
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Will it be approved?
Regulators still have to approve the deal, and it is not guaranteed to go through. In 2016, the Competitions and Markets Authority (CMA) and Ofcom stopped Three’s attempted takeover of O2, amid fears that the deal would lead to higher prices.
“This will be a hard sale given that both companies have been outperforming the market for the last year or so,” Paolo Pescatore at PP Foresight said.
“Let’s see if the authorities have a change of heart. Both parties need to demonstrate that this is genuine in the interests of UK plc, the economy, and consumers for it to have a chance of getting over the line.”
The Unite union has already urged the UK government to block the merger, calling it ‘reckless’.
Gail Cartmail, executive head of operations for Unite said: “This deal will give a company with deep ties to the Chinese state an even more prominent place at the heart of the UK’s telecommunications infrastructure.
“On top of that, it will hike people’s bills and mean job losses for Vodafone and Three workers. The government must step in and stop this reckless merger and Unite is building a cross-party coalition to demand they do so.”
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