Vodafone and Three Deal Referred to Phase 2 as Expected
The CMA has raised concerns about the proposed Vodafone/Three merger as expected following its initial Phase 1 investigations.
In short, the CMA is concerned that:
Combining two of the four mobile network operators in the UK could lead to mobile customers facing higher prices and reduced quality
A merger will reduce rivalry between mobile operators to win new customers
There will be a knock-on effect that will impact MVNO ability to negotiate good deals
The net result could be a lower investment in UK mobile networks
“Whilst Vodafone and Three have made a number of claims about how their deal is good for competition and investment, the CMA has not seen sufficient evidence to date to back these claims,” stated Julie Bon, Phase 1 decision maker for this case at the CMA.
You can read the full document of its Phase 1 findings here.
Unlike the Virgin Media and O2 merger, where the CMA decided to go straight to Phase 2, it was important to start the process of engagement and information gathering during this Phase 1 process. With such a large deal involving such significant players there are always concerns which need to be addressed, and any other outcome apart from this would have been a surprise.
A marriage of convenience, however, makes sense. Scale is key to help lower costs and improve margins, but it could take years before we see the benefits of this deal come to fruition if it goes ahead. The question is, can the UK wait that long? 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.
Interestingly, the word “spectrum” only appears twice in the full decision.
These are all complex issues. While technically the CMA has given Vodafone and Three five working days to respond with meaningful solutions to its concerns, the reality is that the deal will be referred to a more in-depth Phase 2 investigation lasting 24 weeks (extendable by up to 8 weeks in certain circumstances).
“Having reached this important milestone, we look forward to working with the independent panel on the Phase 2 process,” commented Vodafone UK CEO Ahmed Essam in a joint statement from the two companies that emphasised the benefits of scale, an £11bn investment potential in 5G, and “an operator with the scale required to take on BTEE and VMO2.”
Below for more context is the full text I wrote at the start of February when the start of the investigation was announced.
Vodafone and Three Merger Under Investigation
Unsurprisingly, the UK Competition and Markets Authority has said that it will investigate the proposed tie-up between Three and Vodafone.
This was widely expected and now starts the lengthy process of assessing whether it will impact competition and choice in what continues to be a changing and competitive UK marketplace. An initial probe will spend 40 days trying to assess any deal’s negative impact on competition.
For the two companies, a marriage of convenience between both companies makes sense. Scale is key to help lower costs and improve margins. This is not the first time two UK mobile players have tried to come together. A precedent for the deal has already been set with the failed Three/O2 deal — which at the time I was firmly against.
Over the last few years, however, we’ve seen significant corporate moves in the ever-changing UK telecoms market. BT acquired EE and Virgin Media and O2 came together, with both receiving the necessary regulatory approvals following concessions. In these cases, the number of players in each sector remained the same. Interestingly we are still seeing them play out as a prolonged time for integration has been required as a consequence of having to deal with the pandemic, as well as accelerated changes in consumer behaviour.
For and against
From a pure market perspective, you cannot ignore the fact that it will lead to a reduction in mobile network operators from four to three, meaning less choice for customers. The counterargument to this is that the UK has a vibrant MVNO landscape with a plethora of providers offering punchy deals; even as low as £5/month undercutting the mobile network providers. Most of these MVNOs are supported by rival networks such as BT/EE and VMO2.
The argument for both companies joining up is far stronger from an investment perspective. Looking at the overall UK telecoms market, it is now polarised with two vertically integrated telcos at one end and two subscale mobile operators at the other. This is something that Ofcom recognises, with both Three and Vodafone deemed to be sub-scale, generating low returns and cash flows. This is despite reasonably outperforming the market in terms of subscriber additions.
With this in mind it makes perfect sense for these two companies to come together in order to create a stronger mobile network operator from an investment point of view. This would then increase investment in mobile networks and provide a better quality of experience for customers. Therefore, rather than decreasing the number of mobile operators from four to three, in reality it increases the competitive landscape from two to three players.
Convincing the CMA of this will be the real test. It has enjoyed flexing its muscles recently — witness its (now overruled) objections to Microsoft’s $69bn acquisition of gaming giant Activision Blizzard. However, even it has to acknowledge that current investment levels are not sustainable in the longer term.
Receiving approvals
To receive the necessary approvals, I fully expect both parties to agree to concessions on spectrum and the merged entity will have to provide solutions on areas like network sharing, rather than create another problem. A chunk of higher band spectrum will most likely be offered to a rival network; as the merged entity creates a spectrum asymmetry that is unprecedented in the UK.
The network-sharing component of all this is a bit more complex to unravel. Three is currently in a joint venture with EE known as MBNL, whereas Vodafone is in a tie-up with VMO2 under Cornerstone. In essence, given that Three will currently have a presence in both camps, the CMA will need to look closely at this part of any deal to ensure that it does not disincentivise investment.
It is apparent that by Three and Vodafone combining networks, they should be in a better position to serve other MVNOs, creating a new competitive player to challenge BT/EE and VMO2.
There is potentially another issue around retail pricing, which historically tends to go up once two companies come together. For consumers this seems to be heading in the wrong direction given the cost-of-living crisis and perhaps the current system for price rises is not being well received. All providers are now reacting to Ofcom’s review of inflation-linked mid-contract price rises released in mid-December, 2023. Recently, EE set the tone for the new era by becoming the first UK telco to abolish % and CPI pricing for pounds and pence.
Clearly all this is separate from the merger. The authorities will be looking at the potential impact in all aspects of the business.Regardless, it is hard to see how they could impose price restrictions in light of all players currently raising prices out of necessity.
For now, it is safe to expect a Phase 2 detailed investigation to take place after the initial digging is over. Both parties will need to demonstrate that a deal is genuinely in the interest of UK plc, the economy, and consumers for it to have a chance of getting over the line. Personally I believe it stands a better chance of getting over the line in the current climate than similar previous failed moves.
This will not be the last move in the UK. Expect to see a flurry of smaller deals involving the alt nets. As things stand, the fixed line market cannot support all players as there are too many chasing too few pounds. Consolidation is inevitable given the overbuild that is taking place.