Another major piece of mobile M&A appears to be in the works in the UK. Today Vodafone confirmed it is in merger talks with Three UK, a carrier owned by CK Hutchison, to speed up their 5G rollout. A deal would not involve any cash consideration, Vodafone said:
“The contemplated transaction would involve the two companies combining their UK businesses, with Vodafone owning 51% and our partner CK Hutchison owning 49% of the combined business,” he wrote in his official market statement released earlier. during the day. The statement itself was made in response to press speculation around a possible deal, Vodafone noted. He described the combination as a “cashless” deal, meaning no actual price, valuation of the deal, or other financial consideration paid as might be the case with an acquisition.
Vodafone is listed on the UK stock exchange and its market capitalization is currently around £28.7 billion, or $32.2 billion at current rates. CK Hutchison has a market cap of around $21 billion (but also controls other assets).
The history of mobile operators in the UK has been one of the proportions of a saga-style soap opera. Three has a major merger attempt in its past, a £10.25bn deal for rival carrier O2. However, this agreement was blocked by regulators in 2016; only for regulators, four years later in 2020, to reverse that decision.
By this point, O2 had moved on to a different combination: it had merged with Virgin Media/Virgin Mobile (which itself had been acquired and merged by Liberty Media with its former pay-TV assets) in a $39 billion. Meanwhile EE – itself a merger of T-Mobile and France Telecom acquired then split again Orange – was acquired by BT (which owned O2, then spun it off, then also signaled plans to buy it out) in a $19 billion deal. (Three have also struck smaller deals in the meantime, like this one for $373 million for UK Broadband to win more mobile spectrum.)
Vodafone was always within arm’s reach of all this junk.
It can be said that this is partly due to the fact that it was the market leader in Europe as a whole, and in particular in the United Kingdom. These various mergers and acquisitions, however, have had the effect of helping these other carriers to gain momentum and, therefore, putting more pressure on the market leader.
Now Vodafone needs Three’s scale to be competitive, and Three needs Vodafone. Or at least that’s probably what they’ll say if they go into a formal process and the deal is subject to regulatory approval. This overturned merger decision in Three’s past did not result in Three reuniting with O2, but in the end it could still prove useful, laying the groundwork for approving any subsequent major mergers Three attempts, like this now with Vodafone.
The big takeaway from all of the above is that mobile operators are always aiming for more scale – essential to the economics of the capital-intensive, infrastructure-intensive operator business model, but these days this all the more important because of the data and customer ownership this scale brings to operators, and because there are fewer routes for operators to monetize users, given the amount of content and of services that are decoupled from customer relationships with operators.
The question of scale is also at the heart of this latest agreement.
Vodafone plays its merger card very carefully here. He notes that the deal would be struck to accelerate the rollout of 5G through a larger single network, in particular that it would make such a rollout more financially viable – using a statement from the government itself about the two operators to support his assertion.
“The UK Government rightly sees 5G as transformative for the economy and society and essential for the UK to become more competitive in an increasingly digital world,” he notes, but, ” aAs Ofcom has identified, some operators in the UK – Vodafone UK and Three UK – lack the scale to earn their cost of capital. By combining our businesses, Vodafone UK and Three UK will gain the scale needed to be able to accelerate the rollout of full 5G in the UK and extend broadband connectivity to rural communities and small businesses.
This is only the first step in the process, which may or may not result in an agreement; Vodafone said he and Three would make more statements as the talks progress, so watch this space.