Vodafone UK and Three UK plan to merge subject to due diligence and regulatory approvals. The deal is being done because it is not possible for each network alone to recover the cost of setting up 5G networks in line with Government aspirations. Vodafone would get a controlling 51 per cent. The merger will be financed by a share swap with no cash changing hands.
Vodafone said: “The UK Government rightly sees 5G as transformational for the economy and society and critical to the UK becoming more competitive in an increasingly digital world.
“The conditions to ensure thriving competition in the market need to be nurtured, otherwise the UK is at risk of losing the opportunity to be a 5G leader.
“As Ofcom has identified, some operators in the UK – Vodafone UK and Three UK – lack the necessary scale to earn their cost of capital (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.
“The merged business would challenge the two already consolidated players for all UK customers and bring benefits through competitively priced access to a third reliable, high quality, and secure 5G network throughout the UK”.
Telecoms analyst Paolo Pescatore of PP Foresight commented: “It is unclear whether a merger with Three UK is the silver bullet. It certainly makes sense for Three UK given its mobile-only position. It seems apparent that these two players are seeking in market consolidation to be a mobile champion. In mobile there could be some scope to compete head on with O2 and EE; especially in 5G.
“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 loosing further ground in the UK and as it has done in other European markets.
“A marriage of convenience makes sense given the rapidly converged landscape but both cater to different market segments.
“Sky will be sniffing around at any strategic deal in telco that could pose a greater threat to BT. Further down the line expect to see a slew of corporate activity among the altnets leading to between two and four national fixed line networks”.
(More follows ..)
