Five years later, and the deal is done: the long-running saga to combine mobile operators Vodafone and Three in the UK is finished – in a £16.5 billion merger that creates a new number-one in the market, with 29 million mobile customers, and “cements one of the most important structural changes in the history of UK mobile”.
The new joint-venture operator is called VodafoneThree, and is 51-percent owned by Vodafone Group and 49-percent owned by CK Hutchison Group (CKHGT), part of CK Hutchison, parent to Three, Vodafone’s former rival in the UK market. And now, as many sage market watchers pointed out, the hard work begins.
Vodafone UK chief Max Taylor takes over leadership of the new entity. Taylor is a 10-year veteran of EE, where he held commercial and marketing roles until 2019, which was itself formed long ago by the 2010 combination of Orange and T-Mobile (France Telecom and Deutsche Telekom) in the UK market, and which has been knocked off its perch by the merger of the country’s second- and fourth-placed mobile operators.
The other major national operator in the UK is Virgin Media O2 (VMO2), a 2021 joint venture between Telefonica’s O2 and Liberty Global’s Virgin Media businesses in the UK.
Three UK’s Darren Purkis is appointed chief financial officer at VodafoneThree.
VodafoneThree said it will invest £11 billion over the next 10 years to create “one of Europe’s most advanced 5G networks”. It will invest £1.3 billion in capex in its first year, it said, to kickstart its joint ‘standalone’ 5G (5G SA) deployment. The combined business is expected to deliver cost and capex synergies of £700 million per annum by June 2029 (“by the fifth year after completion”), when the transaction is accretive to Vodafone’s adjusted free cash flow.
The new company put focus, as well, on benefits for the UK economy, scientific and tech research, and public services.
Max Taylor, chief executive at VodafoneThree, said: “VodafoneThree will aim to connect every community across the UK with one of Europe’s most advanced 5G networks. Underpinned by an unprecedented £11 billion investment we will build the UK’s best network. Together we will drive growth and innovation, set new standards for our industry supporting all businesses, rural and urban communities.”
Margherita Della Valle, group chief executive at Vodafone, said: “The merger will create a new force in UK mobile, transform the country’s digital infrastructure and propel the UK to the forefront of European connectivity. We are now eager to kick-off our network build and rapidly bring customers greater coverage and superior network quality. The transaction completes the reshaping of Vodafone in Europe, and following this period of transition we are now well-positioned for growth ahead.”
Canning Fok, deputy chairman at CK Hutchison and executive chairman at CKHGT, said: “As we have demonstrated in other European markets, scale enables the significant investment needed to deliver the world-beating mobile networks our customers expect, and the Vodafone and Three merger provides that scale. In addition, this transaction unlocks significant shareholder value, returning approximately £1.3 billion in net cash to the group.”
Kester Mann, director of consumer and connectivity analysis at CCS Insight, said on social media: “This… cements one of the most important structural changes in the history of UK mobile… The merging parties have little time to celebrate, however… [Their] biggest challenge will be to combine two established mobile networks that bring a complex assortment of different suppliers and technologies. CEO Max Taylor will also face difficult decisions in areas such as brand, retail, jobs, and market positioning.”
Enders Analysis published a research note a couple of months back about the merger, which predicted “continued pressure at the budget end… [and] intensifying competition at the top end”, and suggested Virgin Media O2 will likely get “more but different” spectrum as a consequence of the deal (“a 68 percent uplift to its capacity”), while EE-parent BT Group is forced to make “big strategic decisions” in response.
It stated: “Although the network upgrade plan will take many years to effect fully, there will be some very notable upsides within the first year. Commercially we see some opportunities on broadband, less so on FWA short term, and we expect the company to tread very carefully on retreating from any of its main brands.” It called the deal a “significant positive” for Vodafone with the potential to double its excess free cashflow.
It also highlighted strategic issues around “rolling over of MVNO contracts, dissolution of MBNL, and the independent valuation of Vodafone3 for call and put options”.
Karen Egan, head of telecoms at the firm, added on social media: “New information on spectrum trading confirms the view that BT/EE will be most capacity constrained, but with various strategic options available to it. Expected EBITDA growth of nine percent per annum at VodafoneThree would allow Vodafone to almost double its excess FCF. Budgeting for buying CK Hutchison’s stake, however, may curtail Vodafone’s spending over the coming years.
Meanwhile, Matthew Howett, founder and chief executive at Assembly Research, remarked “It is worth a few words on the £11 billion investment commitment, which ultimately saw it approved. While most merging parties would probably lament the time it takes to get such a deal through, here a lengthy review period probably worked… During that time a new government was elected with a mission for investment-led growth… and the Competition and Markets Authority (CMA) became more amenable to behavioural remedies.
“The result was a commitment to spend £11 billion over eight years to build a new, enhanced 5G network. This investment will focus on improving network quality, reliability, and capacity, aiming to serve 99 percent of the UK population. Ofcom now faces a new and untested challenge in monitoring that remedy. The regulator’s monitoring must be close and timely to ensure investment and pricing obligations are met, and to protect against the kind of risks some stakeholders warned about.
“Importantly, Ofcom is up for the challenge, and there is a wider programme of work ongoing with DSIT to address coverage issues. Finally, it won’t just be Ofcom and the CMA keeping an eye on things. The commitments given have also captured the attention of operators elsewhere in Europe keen to see a similar consolidation from 4 to 3 in mobile. Time (and the review of the EU merger guidelines) will tell if we see the model replicated elsewhere.”
