Approvals are only the starting blocks; the challenge is making the merger work in terms of networks, operations, customers and the bottom line
The Competition and Markets Authority (CMA) has decided Vodafone’s merger with Three should be allowed if they sign binding commitments to invest billions in 5G infrastructure across the UK. In the shorter term, the combined entity must protect customers by agreeing to cap certain mobile tariffs and offer “preset contractual terms” to MVNOs for three years.M
Vodafone and Three were also obliged to agree to hand over some spectrum to Virgin Media O2 to get the deal through, which is good news for VMO2’s mobile customers. The mergees got off pretty lightly in terms of having to divest assets to gain the necessary approvals.
The qualified approval comes after a protracted inquiry and consultation process. The independent inquiry group published its final decision today. The merger is expected to formally complete in the first half of next year.
A new force in the market?
When the deal was announced in June 2023, the terms of the deal were that Vodafone would own 51% of the combined operator with an option to acquire CK Hutchison’s 49% after three years if the merged group reached an enterprise value of £16.5 billion.
Vodafone Group’s CEO, Margherita Della Valle, said in a statement, “Today’s approval releases the handbrake on the UK’s telecoms industry, and the increased investment will power the UK to the forefront of European telecommunications.” Della Valle is making good progress with her to-do list, having got this merger through and exited the uneconomic markets of Italy and Spain since becoming CEO. She still has a long way to go on the share price, though.
The Deputy Chair of CK Hutchison, Canning Fok, claimed the network investment plan would ensure “customers across the country benefit from world-beating network quality”.
Terms and conditions apply
Assuming the mergees agree to the strictures, the network commitment is to be overseen by Ofcom, the telecoms regulator, and the CMA. The merged company will be obliged to publish an annual report setting out its progress on implementing the network plan. The CMA will be responsible for monitoring and enforcing the protections relating to consumer tariffs and wholesale terms.
The new operator will have its work cut out. First of all, only a tiny percentage of mergers deliver all the benefits they promise and fusing two lots of infrastructure in an efficient and economic fashion, never mind the IT systems, will not be a walk in the park. BT’s painfully poor and slow integration of customer-facing systems for fixed and mobile is a good example of what not to do.
One the other hand, BT’s mobile and fixed networks is in a league of its own in the UK but there is plenty of room for improvement. UK customers will benefit from a rival of sufficient scale breathing down its neck.
Simon Frumkin, CEO of connectivity infrastructure-as-a-service provider Freshwave, adds, “The last telecoms merger in the UK led to a lot of investment and innovation, resulting in us being the first European country to launch 4G. Since then, because of the competitive nature of the global ecosystem, the UK has started to fall behind other markets when it comes to network infrastructure deployment and overall quality of service.
“Meanwhile, BT and EE have maintained a leading network quality score akin to those in first class mobile connectivity markets (specifically a score of over 900 in the recent Global Umlaut PBM scoring system). The UK needs all of our network operators to be world class to maintain our competitiveness as a nation and this merger makes that possible.”
More and better 5G needed
Rafael González, CMO, MedUX, is more prescriptive: “While the Vodafone/Three merger includes commitments to invest in 5G, general investment alone may not be sufficient to improve the experience for UK citizens and enterprises. Capital expenditure should specifically focus on enhancing 5G coverage, availability, reliability, and performance.
“With various versions of 5G offering different quality levels, it’s essential to address overlooked factors such as the spectrum bands used, minimum required speeds, and the performance capabilities necessary for new use cases. Considering these factors is crucial for contributing to positive social welfare and improving network quality.”
A long game
The plan is that Vodafone/Three will form the UK’s biggest converged operator. As Paola Pescatore, founder of analyst house PP Foresight, says, “The bottom line is it will take many years before the full merits of the deal are realised [if they are, of course], and there’s a lot of tough decisions to come. Merging two networks is no easy feat…there are past examples with BT/EE and VMO2 to draw upon. It’s not going to be smooth sailing.”
He adds, “Rivals will have a window of opportunity to lure disgruntled customers during this painful integration process. Priorities will be implementing a successful strategy and choosing a brand that resonates with consumers and business. On this it is very hard to see the Vodafone brand disappearing from its home core UK market. Better price guarantees in the next few years will be a big pull for customers.
“Overall, it’s a big deal for both players, arguably even more so for Three given its business model would have been unsustainable in the long term.”
He concludes, “This will most likely be the last major deal the CMA will see in telco. There are few strategic moves left within the UK.”