Updated: What we know so far about the potential merger between Three UK and Vodafone

Vodafone's chief executive Nick Read says cutting the UK market from four major mobile phone operators to three would be “healthy for the sector, healthy for investment and still have good competition”.

A report in the Telegraph said Mr Read refused to comment on reports that the FTSE 100 company is in discussions with Three about merging their UK businesses but said that the "fragmented" nature of the UK telecomms market was limiting investment.

Mr Read said: “I really can’t comment on press speculation. What I would say is that if I look at a higher level at the UK market my view is that it remains a very fragmented market which is resulting in poor returns and under investment.

“You could look at the UK and say it needs two fixed networks, which it has, and three mobile networks to give a healthier structure for investment going forward.”

The combined companies would have around 27m customers in Britain and vast assets in mobile spectrum.

A report in the Financial Times in May said key sources had confirmed that negotiations were underway about a potential merger between Three UK and Vodafone.

Three UK and Vodafone are two of the biggest operators in the UK but their business models are under pressure from a convergence of telephone technologies brought about by the rise of 5G. A merger, some argue, would give the pair the scale to compete and respond to the technological changes and competitor challenges that will arise in the years ahead.

Merger talks

Reading-based Three UK and Vodafone, which has its HQ in Newbury, have been holding merger talks from at least January when the news initially broke with Three UK CEO Robert Finnegan and Vodafone CEO Nick Read both publicly backing the need for consolidation within the marketplace since the start of the year.

Three UK is currently in the process of moving its Maidenhead and Reading staff to new offices in Green Park, pictured above.

The two companies are in good financial health with Vodafone's recent trading update noting that it had 152,000 customers in the UK and that it reached almost 1 million fixed broadband customers.

Three UK saw revenue last year increase 4% year-on-year to £2.44 billion while EBITDA rose 10% to £609 million.

What the CEOs say

Vodafone's chief executive Nick Read confirmed in February that the telecoms giant is in merger talks in its European markets and that it is also considering consolidations with its rivals in Germany, Spain and Italy.

Nick Read told the Guardian: "There has been media speculation about merger and acquisition activity in specific European markets.

“We feel the UK needs to consolidate to give [us] industrial scale so we can improve returns.

“We are active on a number of fronts and seeing good engagement from our counterparties, which confirms that we have a series of potential opportunities to shape the business with stronger assets in healthier markets and unlock value for our shareholders. We are approaching consolidation with speed and resolve.”

Nick Read's calls for mergers were also backed up by Three UK CEO Robert  Finnegan in March who said there had to be “structural change” in the UK’s telecommunications sectors which had become “dysfunctional”.

He said: “The UK market with four operators continues to remain dysfunctional and requires a structural change to improve the overall quality of infrastructure that UK customers should expect."

Analyst view

Telco analyst Paolo Pescatore said that a merger between the two is likely and would be beneficial for Three UK UK “given its mobile-only position”.

“Both Three and Vodafone are in a challenging position given the growing importance of convergence. Ultimately scale is key and with this in mind a move to merge could make sense,” he told IT Pro.

“While Vodafone is addressing this through wholesale agreements in the fixed line market, it is unclear whether a merger with Three UK is the silver bullet,” he said, adding that Vodafone “will need to move quickly to avoid losing further ground”.

Ofcom

Ofcom also appears to have softened its stance on a potential merger between Three UK and Vodafone following its previous opposition to the joining of Three UK and O2.

In 2015, Three UK was one of the main contenders to merge with O2, offering a proposed sum of £10.25 billion for the deal that was deemed unwelcome by Ofcom and ultimately blocked by the European Commission in May 2016.

Months later, Three UK launched legal action against the EU regulator, with the European Court of Justice annulling the 2016 decision in May 2020.

A discussion paper on the body's future approach to the mobile telephone market indicated that it would base any decision on allowing the merger on the circumstances of the deal and not on maintaining a fixed number of phone operators in the UK market.

The regulator said the competition of four operators — EE, O2, Vodafone and Three UK — had “served the UK well”, but added in the paper that “The question of whether a particular merger is likely to result in a substantial lessening of competition will turn on the effectiveness of competition that can be expected in the market after the merger, rather than just the number of competitors.”

Investor pressure

Investors in the FTSE 100 company are becoming increasingly critical about the company's management inability to complete major mergers of acquisitions despite the board stating that its intention was to acquire rival groups where the was significant competition with the UK, Spain and Italy pinpointed as key markets.

Peter Schoenfeld, founder of New York-based hedge fund PSAM, told the FT:

“Vodafone’s failure to do a deal has been a problem,”

“It’s not like they’re not focused on the right areas and trying to pursue opportunities. It’s that they’re executing poorly.”

One top 20 investor said: “We have serious doubts that the company can re-establish credibility with its legacy CEO and his strategy. There have been too many disappointments and missed opportunities.”

Vodafone's board is also under pressure from activist investor Cevian to focus on its most profitable markets and make changes to its executive.

Vodafone chief executive Nick Read said that he was keen to broaden Vodafone's footprint.

“I look at markets where I see a strong case for consolidation without the need for punitive remedies, he said.

"Those markets [are] Spain, Italy, the UK and now Portugal. Those four markets are the largest opportunity with a good and solid rationale,” he said. “We are engaged with multiple parties in multiple markets. We will remain open-minded and pragmatic to work through the opportunities at pace.”

Emirates Telecommunications move

Middle Eastern telecoms group Emirates Telecommunications acquired an almost ten per cent of Vodafone shares in May to become the Newbury-based firm’s biggest shareholder.

The state-controlled group, which recently rebranded from Etisalat to e&, spent £3.3 billion on its 9.8 per cent acquisition over the weekend.

The Abu Dhabi-based group, which has created a special holding company – Atlas 2022 – to control the Vodafone stake, said it did not intend to launch a full takeover bid.

Hatem Dowidar, group CEO of e& said: “We are looking forward to building a mutually beneficial strategic partnership with Vodafone with the goal of driving value creation for both our businesses, exploring opportunities in the rapidly developing global telecoms market and supporting the adoption of next-generation technologies."

New board appointment

Vodafone appointed Stephen Carter, the CEO of DTVE parent company Informa, to its board as a non-executive director in May.

Carter is expected to take up the post following ratification by shareholders at the company's AGM on July 26.

The CEO of Informa has led a number of acquisitions including those of Penton Information Services and UBM PLC alongside the divestiture of the Pharma Intelligence business.

He was the first CEO of Ofcom and served as chief of strategy for former UK prime minister Gordon Brown and Minister, Communications, Technology & Broadcasting within the UK Government.

Vodafone’s Chairman, Jean-Francois van Boxmeer said: “I am delighted to welcome Stephen to Vodafone’s Board. He brings a track record of value creation and he has extensive commercial and regulatory experience in the telecoms and media sectors. I look forward to Stephen’s valuable contribution as the Board and management team work closely together to drive the execution of Vodafone’s strategy, to achieve our commercial and portfolio priorities and deliver long-term value for shareholders.”