Vodafone and CK Hutchison agree UK mobile merger

Vodafone and Three-owner CK Hutchison have agreed to combine their UK mobile businesses in a deal that would create the country’s largest operator.

The plan, announced on Wednesday, will create a mobile network with 28mn customers that would leapfrog EE as the UK’s largest mobile group. It will also reduce the number of networks in the UK from four to three and is likely to face a battle for regulatory approval.

Under the deal, Vodafone will merge its domestic business with CK Hutchison’s Three UK. Vodafone will own 51 per cent and Hong Kong-based Hutchison 49 per cent of the combined group.

Executives at the two companies hope the long-awaited deal will increase profits in what they argue is an overcrowded market. But it is expected to face intense scrutiny from the Competition and Markets Authority, which has longstanding concerns about market concentration and rising prices.

On Wednesday, Hutchison said customers “will pay the same and obtain considerably more value due to the significantly better network”.

Paolo Pescatore, analyst at PP Foresight, said Vodafone and Three UK already outperform the market on customer growth. “This is why it’s a hard sale in the eyes of the regulators . . . Why should these two companies come together, reducing choice that potentially could lead to higher prices? It’s hard to justify.” 

Hutchison said that at least 7mn customers would benefit from better network performance immediately and the deal would also allow the group to invest in the UK’s 5G network.

It said both groups “currently lack the necessary scale on a standalone basis to earn their cost of capital, which puts at risk their ability to invest efficiently and sustainably”.

People with knowledge of the details, said deal synergies could add up to £7bn over five years.

No cash will be paid, but the two sides will contribute different debt amounts owing to their respective shareholdings.

Vodafone UK will take out £4.3bn and Three UK £1.7bn in cash from existing debt, leaving the merged group with debts of about £6bn. Vodafone will have the right to buy the whole business after three full years.

Vodafone UK CEO Ahmed Essam will be head of the new group and Three UK CFO Darren Purkis will be chief financial officer.

The deal comes a month after Vodafone’s new chief executive Margherita Della Valle announced plans to axe 11,000 jobs over the next three years. A weak performance in several of the group’s major markets, including the UK, cost her predecessor Nick Read his job at the end of last year.

Della Valle said on Wednesday: “The UK will benefit from the creation of a sustainable, strongly competitive third scaled operator, with a clear £11bn network investment plan.”

Shares in Vodafone, which is FTSE 100 listed, have fallen 42 per cent over the past year, compared to a 5 per cent rise in the index. Three UK has had low investment and low returns for many years and has earned below its cost of capital since 2019.

Canning Fok, group co-managing director of CK Hutchison said: “Three UK and Vodafone UK currently lack the necessary scale on their own to earn their cost of capital. This has long been a challenge for Three UK’s ability to invest and compete.”

Hutchison is a Hong Kong-listed conglomerate with businesses ranging from retail and ports to telecoms.

Vodafone and Hutchison have argued a UK merger would enable the scale of investment required to roll out full 5G networks and improve broadband connectivity.

However in the past, regulators have resisted deals that would cut the number of major operators from four to three.

In 2016, EU regulators blocked Hutchison’s first attempt at consolidation in the UK, stopping its deal to buy O2 in the UK from Telefónica to create a mobile operator that would have controlled about 40 per cent of the market. The CMA also opposed the merger as did the UK telecoms regulator Ofcom.

However, in February, Ofcom said its decision on any merger of the big four UK operators would now be “informed by the specific circumstances of that particular merger, rather than just the number of competitors”.

James Gray, managing director of mobile industry consultancy Graystone Strategy, said that since the Three UK-O2 merger was overruled, “there has been quite a lot of market changes . . . [including] the successful merger of Virgin Media-O2 and consolidation of networks across Europe.

“There seems to be a general sense that in the right market conditions, consolidation can be a positive thing.”

The two companies are likely to need to offer regulators concessions, according to analysts, such as selling some of their broadband spectrum holdings.