Vodafone and Three have officially announced plans to merge in a move that is set to hugely shake up the UK mobile market.
In a statement, Vodafone and CK Hutchinson, the owner of Three UK, confirmed a deal that should see the formation of a new £15bn-valued telco giant and, "create one of Europe's leading 5G networks."
Vodafone is set to be the slight majority owner of the new combined group, known for now as MergeCo, controlling 51%, with CK Hutchinson keeping the remaining 49%.
Vodafone-Three merger
Margherita Della Valle, Vodafone Group Chief Executive, described the merger as being “great for customers, great for the country and great for competition.”
“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 best in Europe – 5G network, offering customers a superior experience," she added.
"As a country, the UK will benefit from the creation of a sustainable, strongly competitive third scaled operator – with a clear £11 billion network investment plan – driving growth, employment and innovation. For Vodafone, this transaction is a game changer in our home market. This is a vote of confidence in the UK and its ambitions to be a centre for future technology.”
“Today’s announcement is a major milestone for CK Hutchison and for the UK," added Canning Fok, Group Co-Managing Director of CK Hutchison. "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."
"Together, we will have the scale needed to deliver a best-in class 5G network for the UK, transforming mobile services for our customers and opening up new opportunities for businesses across the length and breadth of the UK. This will unlock significant value for CK Hutchison and its shareholders, realise material synergies, reduce net financial indebtedness and further strengthen its financial profile.”
In a press release, the two companies highlighted the advantages of combining their two 5G networks for consumers and businesses alike.
They expect MergeCo to deliver up to £5 billion per year in UK economic benefit by 2030, supporting the digital transformation for schools, hospitals and businesses, with its standalone 5G network will cover every school and hospital in the UK by 2030, helping deliver the Government’s stretch ambition as set out in the Wireless Infrastructure Strategy.
MergeCo also intends to invest over £6 billion in the first five years, and £11 billion over a ten year plan, to create a best-in-class 5G network, supporting between 8,000 and 12,000 new jobs in the wider economy.
Analysis: A major disruption - for better or worse?
Rumors of Vodafone/CK Hutchinson merger have been ongoing for quite some time now, and triggered major moves in the market, with Della Valle's predecessor Nick Read, stepping down due to not being able to consolidate the UK market, which frustrated shareholders.
Less than a month ago, Della Valle announced the company would be cutting 11,000 jobs in an effort to become more agile on the market.
The deal is still pending regulatory approval in both the UK and CK Hutchinson's home nation of Hong Kong, with some observers not viewing the further reduction of the number of UK network operators very kindly.
If the deal does end up going through, the resulting group will become the biggest mobile operator in the UK, with some 27 million customers. That would place it above BT’s EE and VM O2, as well as Liberty Global, which some analysts have predicted could disrupt the UK market significantly.
“This long-awaited mega merger represents the biggest shake-up in the UK mobile market for over a decade," noted Kester Mann, Director, Consumer and Connectivity, CCS Insight.
“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%.”
“My view is that 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.”
“A marriage of convenience makes sense. Scale is key to help lower costs and improve margins," noted Paolo Pescatore from PP Foresight.
"It will take years before we see the real fruits of this deal come to fruition. The question is, can the UK wait that long? However, convergence still remains the achilles heel if this does get over the line. It would create a mobile champion that could increase competition in the wholesale segment of the market and become a partner of choice for MVNOs.”
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