Vodafone in talks to combine UK arm with CK Hutchison’s Three

Telecoms group Vodafone is in talks to combine its UK operations with its domestic rival Three UK, the mobile operator owned by Hong Kong infrastructure conglomerate CK Hutchison, people with direct knowledge of the matter said.

The deal, if it materialised, would herald the latest attempt to consolidate the British mobile market as Vodafone faces pressure from Europe’s largest activist investor, Cevian Capital, to simplify its business, pursue deals in national markets and improve returns.

A combination of Vodafone UK and Three UK would bring together the third and fourth largest mobile network operators in Britain, though any deal to reduce the number of leading brands from four to three would trigger scrutiny from competition authorities.

Industry executives are hopeful that regulators’ increased awareness of the need to invest in network infrastructure has made them more amenable to mergers than they were in 2016, when the European Commission blocked a proposed merger between O2 and Three.

European telecoms groups have struggled over the past decade, with strong competition and consumer-friendly regulation weighing on earnings. Although Vodafone’s share price has rallied by 3 per cent since the start of the year, the company has shed 44 per cent of its value over the past five years.

Three, meanwhile, has struggled to gain scale over the past few years, despite ambitions to double its size. Though the company has enjoyed an increase in net new customers since mid-2020, it has not managed to translate those gains into significant revenue growth. Last week, the company reported flat quarter-on-quarter revenues of £582mn.

Over the past year, Vodafone chief executive Nick Read has been vocal about his desire to pursue deals in countries he believes suffer from an excess of market competition, including Spain, Italy and the UK.

The exact structure being discussed between Vodafone and CK Hutchison could not be learned, though Read has said on many occasions that he is focused on pursuing combinations more than outright purchases, given his ambitions to reduce the group’s debt.

Earlier this year, analysts at Enders Analysis noted that Vodafone’s “lack of funding capacity” suggested that in the UK it could look to “form a joint venture with the potential to contribute additional debt or receive cash equalization payments to assist with leverage reduction”.

Analysts had previously speculated that Vodafone could seek to buy Three but noted that it would need to meet CK Hutchison’s hefty price expectations for the privilege of consolidating the market.

Discussions between the two companies also took place last year, the Financial Times has previously reported, though they did not lead to a deal.

CK Hutchison did not respond to a request for comment. Vodafone declined to comment.

Vodafone announced on Thursday that it had appointed Lord Stephen Carter, the chief executive of business intelligence group Informa who served as the first chief executive of Ofcom, as a new non-executive director to its board.

He also served as chief of strategy for then prime minister Gordon Brown and as minister for communications, technology and broadcasting between 2008 and 2009.

Leave a Comment