Vodafone and Three deal ‘poised on a knife edge’ – analyst

Vodafone and Three have agreed their marriage. But they still require regulatory approval and there is already precedent for the authorities rejecting such massive consolidation.

In 2016 The European Commission blocked the proposed acquisition of O2 by Hutchison under the EU Merger Regulation. The EC had strong concerns that UK mobile customers would have had less choice and paid higher prices as a result of the takeover, and that the deal would have harmed innovation in the mobile sector.

However the launch of 5G does mean regulators are mindful that carriers lack the scale to generate sufficient returns on their capital. However there is also government pushback against any ownership of telecoms infrastructure by Chinese companies. The National Security and Investment Act, gives the state the authority to intervene and reject the deal

CCS Insights Kester Mann says the deal is “poised on a knife edge and is too difficult to call either way”

“It’s a huge decision for Sarah Cardell, the CMA’s new CEO, who in a recent speech rejected the idea that her body has been overly interventionist in blocking deals”

Erhan Gurses Equity Research Analyst at Bloomberg Intelligence, said: “The push for consolidation is seen as positive for the broader industry, although the question remains whether it will receive antitrust approval. The odds of approval have improved. The Competition and Markets Authority (CMA) may also consider striking a delicate balance between the sector’s investment requirements for 5G roll-outs and consumer welfare. It is worth noting that mobile prices in the UK have remained relatively low compared to other major European markets like Spain or Germany.

But PP Insight analyst Paolo Pescatore believes the deal will “be a hard sale given that both companies have been outperforming the market for the last year or so

“Let’s see if the authorities have a change of heart. Both parties need to demonstrate that this is genuinely in the interest of UK plc, the economy, and consumers for it to have a chance of getting over the line. Ofcom recognises the challenges of the UK mobile market and the need for scale. Convincing the CMA will be the real test. Current investment levels are not sustainable in the longer term.”

“Vodafone and Three may have shot themselves in the foot by recently hiking tariffs by up to 14.4 per cent but the deal should be approved. It is better to have three strong providers than two that are dominant and two that are sub-scale. Blocking it could thwart the long-term development of the UK’s telecoms infrastructure.”

CCS Insight’s Kester Mann believes getting approval will be a challenge.

““This represents the biggest shake-up in the UK mobile market for over a decade. The deal makes plenty of sense as both providers are sub-scale. 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..

“An £11 billion network investment plan will seek to allay regulatory concerns. But this deal will still face a major challenge to win approval. At this stage, I believe it is too difficult to call either way.

“The prospect the deal leads to higher prices will be a major concern for the CMA. Vodafone and Three may have shot themselves in the foot by recently hiking tariffs by up to 14.4 per cent . The deal should be approved. It is better to have three strong providers than two that are dominant and two that are sub-scale. Blocking it could thwart the long-term development of the UK’s telecoms infrastructure.”

“The recent appointment of Margherita Della Valle as Vodafone group CEO will give added impetus to the deal. She has shown clear intent to make changes at Vodafone as she bids to turn the embattled company’s performance around. Securing approval for a tie-up with Three would be a major boost to her early tenure.”

Pescatore thinks the security issues regarding China will be dealt with and overcome .

“Hutchison already has an extensive presence in the UK, but this should be seen as a gradual exit from the telco market. Having the current Vodafone UK CEO heading up the new operation is a testament to this belief. His considered approach will resonate with key stakeholders and improve any chance of getting the deal over the line.”

Dan Ridsdale, Director of Technology Media and Telecoms, at Edison Group, said Vodafone’s statement g read like an overt pitch to convince the CMA, Ofcom, press etc that there would be benefits for customers, country and competition, before looking at deal synergies.

“Management will have a good level of insight into the opinions of key investors regarding the deal, whereas regulators play their cards much closer to their chest. For the CMA, the equation is likely to come down to how much they take into account the consumer benefits from the promised acceleration to the roll out of 5G, gained through economies of scale versus the competitive risks from concentrating market power.

“They will almost certainly consult Ofcom as part of the process who have already highlighted that Vodafone and Three’s poor return on capital under the current market structure presented a risk to future investment in the UK’s networks.”