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Another major mobile M&A segment appears to be in the works in the UK. Today, Vodafone confirmed it is in merger talks with CK Hutchison-owned Three UK to accelerate their 5G rollout. The deal does not include any cash consideration, Vodafone said.
The proposed transaction would involve both companies combining their UK businesses with Vodafone owning 51% and our partner CK Hutchison owning 49% of the combined business, he wrote. According to Vodafone, the statement itself is a response to journalists’ speculation about a possible deal. He described the merger as a “no cash” deal — that is, there is no actual price tag or price estimate or other financial consideration associated with the purchase.
Vodafone is publicly traded in the UK and currently has a market value of around £28.7 billion, or around $32.2 billion at today’s prices. CK Hutchison has a market cap of about $21 billion (but it also controls other assets).
The history of mobile operators in the UK is one of saga-style soap opera proportions. The trio made a big attempt at a merger in the past, with a £10.25 billion deal for rival carrier O2. However, that deal was blocked by regulators in 2016. Only for regulators, four years later in 2020, to reverse that decision.
O2 moved on to a different combination at that point: it merged with Virgin Media/Virgin Mobile (itself acquired by Liberty Media and combined with its former pay-TV assets) in a $39 billion deal. Meanwhile, EE – itself a merger of T-Mobile and France Telecom, and then spun off again by Orange – was snapped up by BT (which O2 owned, then spun off and then reported plans to buy back) in a $19 billion deal. (All three have made some small deals in the interim, such as this one for $373 million to acquire more mobile spectrum for UK broadband).
Vodafone was always at arm’s length from all those wrecks.
Part of the reason for this is that it is the market leader in Europe in general, and the United Kingdom in particular. Those various M&A activities, however, had the effect of helping those other service providers gain more scale and putting more pressure on the market leader.
Now Vodafone needs the balance of three to compete, and Vodafone needs three. Or at least that’s what they’ll argue if they go through the formal process and the deal comes up for regulatory clearance. Three’s previous merger decision didn’t lead to Three’s tie-up with O2, but it could still prove useful in the end, laying the groundwork for any further major mergers to be approved, such as Three’s current attempt with Vodafone.
The biggest takeaway from the above is that mobile service providers have always been critical to the economics of a more scale-intensive, infrastructure-intensive service provider business model, but these days they’re all the more important because of the data and customer ownership. Realizing how much content and services are excluded from customer service provider communications, this measure will bring carriers, and service providers fewer ways to monetize users.
The issue of scale is also central to this latest agreement.
Vodafone is playing the integration card. so true Be careful here. He notes that the deal will accelerate the rollout of 5G by a single large network, specifically making such a rollout more financially viable – using the government’s own statements about the two carriers to reinforce the idea.
The UK Government sees 5G as transformational for the economy and society and sees it as vital to the UK becoming more competitive in an increasingly digital world, but,Ofcom has revealed that some operators in the UK – Vodafone UK and Three UK – do not have the necessary scale to meet their capital expenditure. Combining Vodafone UK and our three UK businesses will provide the necessary scale to accelerate the full 5G rollout in the UK and expand broadband access to rural communities and small businesses.
This is only one step in the process, which may or may not end in agreement; Vodafone says it and Three Talks will make further announcements as they go, so watch this space.
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