Good Things Come in Threes? Analysing the Proposed Vodafone-Three Merger
The UK telecommunications industry has seen its fair share of mergers. In 2010, T-Mobile and Orange joined forces after struggling to increase their business-to-business market share. In 2021, in a noteworthy £31 billion deal, Virgin Media and O2 merged to better compete with industry giants like Sky and BT [1]. Most recently, in June 2023, Vodafone and Three agreed to combine their UK businesses in a deal worth £15 billion.
Under this merger, Vodafone will hold a 51% stake, while Three will hold 49% [2]. However, the merger has attracted scrutiny from the Competition and Markets Authority (CMA) who will determine whether the merger will result in an unfair distribution of spectrum market share.
Driving Force Behind the Merger
Both Vodafone and Three have struggled to meet their cost of capital since 2018 (see Figure 2) [3]. Additionally, their share of the UK mobile market stands at 20% for Vodafone and 15% for Three, trailing behind Virgin Media/O2 and BT (see Figure 1) [4]. The merger is expected to strengthen the operational profile of Vodafone and Three in the UK, and achieve return-on-capital objectives. The Chief Executive of Vodafone, Margherita Della Valle, said the deal will “level the playing field”.
Figure 1: Percentage Share of UK Mobile Market
Vodafone and Three have committed to supporting the UK Government’s ambition to ‘deliver nationwide coverage of standalone 5G to all populated areas by 2023’ [5]. They will invest £11 billion over a decade, to enable the rollout of 5G to 86% of the UK population. Three has previously supported the UK Government to extend mobile coverage to more than 37,000 premises across 2,800 square kilometres [6].
Figure 2: Economic Return on Capital Employed for Four Mobile Network Operators - Ofcom
What does it mean for the Telecommunications Sector?
The consolidation of Vodafone and Three would increase the concentration of the market, potentially resulting in elevated prices for customers. A recent study that analysed telecommunications data from 33 countries over a 13-year period, revealed that a typical merger from 4 to 3 competitors results in a 16% price increase per customer [7]. The Director of Policy and Advocacy at Which?, Rocio Concha, has argued that “reducing the number of network providers from four to three risks reducing the choices available to consumers, raising prices and lowering the quality of services available” [8].
Nevertheless, the joint venture also has the potential to promote competition in the wholesale market and offer better choices for Mobile Virtual Network Operators (MVNO), such as Tesco Mobile, Sky Mobile, and GiffGaff. Currently, MVNOs hold 17% of the retail market and concentrate 90% of traffic through EE and Virgin Media/O2 [4].
Additionally, the merger will empower both companies to expand their presence in the technology sector by leveraging existing infrastructure, resources, and technical knowledge to introduce new services, such as the Internet of Things, Cloud Computing, and Digital Entertainment Platforms. A recent report highlighted that the telecommunication companies who made a ‘bold choice to reinvent their value-creation formula’ are generating revenue growth at a rate of approximately 20 [9].
Looking to the Future
Telecommunication firms are increasingly merging to compete with rivals, advance 5G deployment, diversify revenue streams, and prepare for technological advancements. However, the potential negative impact of such mergers on consumers is still a topic of debate.
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Words by Amir Akbari
Edited by Anna Pringle
References:
[1] https://www.virginmedia.com/corporate/media-centre/press-releases/liberty-global-and-telefonica-to-merge-their-uk-operations-creating-the-leading-fixed-mobile-provider-in-the-country
[2] https://www.vodafone.com/news/corporate-and-financial/merger-vodafone-uk-three-uk-europe-leading-5g-networks
[3] https://www.ofcom.org.uk/consultations-and-statements/category-3/ofcoms-future-approach-to-mobile-markets
[4] https://www.fitchratings.com/research/corporate-finance/vodafone-three-merger-medium-term-credit-positive-22-06-2023
[5] https://www.deeconconsulting.com/deecon-struct/govwirelessstrategy
[6] https://telecoms.com/523014/three-uk-uses-srn-milestone-to-push-vodafone-merger/
[7] https://doi.org/10.1093/epolic/eix020
[8] https://press.which.co.uk/whichstatements/which-responds-to-the-news-that-vodafone-and-three-have-agreed-a-uk-merger/
[9] https://www.mckinsey.com/industries/technology-media-and-telecommunications/our-insights/a-blueprint-for-telecoms-critical-reinvention
