VODAFONE and Three are in merger talks that could see a combined company become the biggest mobile operator in the UK.
The two companies announced the move earlier today and said the deal would create a new major player in the UK mobile market.
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In an update to shareholders, Vodafone said: “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.”
A potential deal would see Vodafone own 51% of the new business, and Three UK owner CK Hutchison would take the rest.
A combined Vodafone and Three business would have around 27million customers.
There’s no immediate impact on customers of either of the company as they are just in talks, but that could change if a deal goes ahead.
If a deal were to be agreed between the two firms, it would still have to be approved by regulators, and that can be a lengthy process.
Mobile firms Virgin Media and O2 recently merged to become Virgin Media O2.
Talks between the firms started in May 2020 and the Competition and Markets Authority (CMA) gave the green light to go ahead a year later in May 2021.
When BT and EE started merging their networks in 2018, existing customers weren’t affected although they were encouraged to sign up for new deals.
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For example, those who signed up to the new BT Plus service could get their broadband, internet and mobile bill in one place.
Vodafone and Three hope the combined size of their businesses will help them move out of a problematic situation where the returns on their investments are not enough to cover the costs.
It has made the companies less competitive with their peers including EE and Virgin Media O2.
“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,” Vodafone said in a statement.
They referred to a report from regulator Ofcom which found that both Vodafone and Three have in recent years delivered returns on investments that are lower than the cost of the capital they used.
“Vodafone and Three may not have covered their cost of capital.
“If ROCE (return on capital employed) was to fall, or was expected to fall, below the cost of capital for a sustained period of time for any MNO (mobile network operator), this could dampen its incentive to invest,” the report from February this year said.
Vodafone said: “As Ofcom has identified, some operators in the UK – Vodafone UK and Three UK – lack the necessary scale to earn their cost of capital.”
It added: “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.”
As companies prepare to phase out their 3G network – Vodafone will do so in 2023 – 5G is being credited with potentially transformational abilities.
A report from Vodafone published in 2020 argued that the roll-out of 5G could bring more than £120 billion in productivity gains to the UK economy between 2025 and 2030.
