Past attempts at 4-to-3 mobile mergers indicate a high bar for approval. Though wholesale competition concerns could be overcome, the risk of price rises for consumers and mid-band spectrum holdings present more of a challenge to getting a deal through
Vodafone has been a vocal proponent of consolidation, while Three has called the UK mobile market “dysfunctional” and “overcrowded”. The parties are reported to have held merger talks, but a deal between them could raise several competition concerns. The CMA, which would likely have responsibility for reviewing such a transaction, took issue with a similar proposal for consolidation before and there is little indication that its position has shifted since.
Aside from creating a new mobile market leader, a combined Three/Vodafone would boast a significant proportion of 5G spectrum in the 3.4-3.8GHz range. While spectrum was not one of the EC’s primary reasons for blocking O2/Three, mid-band (i.e. 1-6GHz) is a priority 5G range and may lead the CMA to consider the balance in assignments between operators and potential divestment options.
The CMA and EC have previously determined that having an operator involved in both UK network sharing arrangements could weaken competition and facilitate information exchange. Similar concerns would likely emerge in a Three/Vodafone merger but may be easier to overcome given that the agreements are less integral to operators’ 5G rollouts and MBNL is set to expire in 2031.
A deal between Three and Vodafone would reduce the number of mobile operators serving MVNOs, potentially leaving them in a weaker bargaining position. As such, the CMA might consider remedies to maintain retail competition, including requiring the merged firm to reserve a portion of network capacity for virtual players.
While the parties might view consolidation as a way to improve returns and unlock shareholder value, we expect the CMA would be eager to protect against the risk of consumer price rises - particularly in light of the current cost of living crisis. We would therefore expect this issue to be the most contentious point within a Three/Vodafone merger, and would potentially require legally-binding concessions.
A proposed merger would encounter a number of regulatory hurdles
Mobile operators are pursuing consolidation in several European markets. One of those most active is Vodafone, which, according to reports, is exploring a tie-up with Three in the UK. Absent any official announcement, a potential deal would likely take the form of a 50:50 joint venture (Vodafone Group’s CEO wants to reduce the telco’s debt), or a takeover by Three (Hutchison was the acquiring party in both Austria and Ireland). Whatever transpires, the two operators are eager to gain scale and to see structural change. While some policymakers may appear more open to three-player mobile markets, there is no guarantee that the UK’s Competition and Markets Authority (CMA), which would probably be the decision maker, would be amenable.
Last time around (in 2015/16), the CMA found several problems with the proposed O2/Three merger, even writing an open letter to the EC to request prohibition of the deal. So what do things look like this time? Should a Three/Vodafone tie-up materialise, we anticipate somewhat benign competition concerns in the fixed market, where Three is relatively small and Vodafone operates primarily through wholesale agreements with CityFibre and Openreach. However, we foresee more contentious issues in mobile, including four possible hurdles to gaining approval: spectrum; network sharing agreements; wholesale mobile access; and the impact on retail prices for consumers.
Spectrum a consideration but not necessarily the biggest concern
A Three/Vodafone combination would create a new market leader based on mobile connections, which would also hold licences for a considerable amount of 5G-ready spectrum (see Figure 1). The merged entity would have access to priority 5G bands, including 700MHz and 3.4-3.8GHz, as well as some 1400MHz and 40GHz spectrum, which may become available for future mobile broadband deployments pending the outcome of an Ofcom consultation that was open at the time of writing. While not one of the EC’s primary competition concerns when it blocked the O2/Three merger, we would expect the spectrum holdings of a combined Three/Vodafone to be scrutinised by the CMA. An area that is likely to warrant attention is spectrum allocation in the mid-band. The C-band, in particular, has been widely used for 5G given its high performance characteristics and developed ecosystem of compatible devices. In combining their spectrum assets, Three and Vodafone would have an enviable 230MHz in the 3.4-3.8GHz range.
Though this accumulation of priority 5G spectrum may not present an antitrust problem per se, many regulators have aimed to ensure a reasonably balanced distribution of frequencies in order that a certain number of competing mobile networks can adequately serve the national market. The CMA could therefore request the merging parties make some concessions via a divestment. Spectrum divestment has been a popular choice of structural remedy in mobile M&A, with Three itself a beneficiary of 2x15MHz in the 1800MHz band following the Orange/T-Mobile merger in the UK over a decade ago. More recently, the Canadian government has indicated that a transfer of some of Shaw’s spectrum assets would be a prerequisite for an acquisition by Rogers.
Network sharing might be less problematic than in the past
While there are four national mobile network operators in the UK, upstream their infrastructure has been pooled into two joint ventures: Beacon (O2 and Vodafone) and MBNL (EE and Three). The arrangements enable scale economies and retail competition; however, a merged entity that straddles both partnerships could raise antitrust issues. During the O2/Three review, the CMA was concerned that a merged firm could exert a degree of control over the operations of EE and Vodafone, thereby undermining the ability and incentive for operators to compete. The CMA also considered that the parties’ involvement in both agreements may facilitate information sharing or coordinated behaviour, and lead to it phasing out one of Beacon or MBNL over the longer term, which could negatively impact the isolated partner.
The EC agreed, stating that the merged firm’s role in both networks would have weakened EE and Vodafone, and hampered the future development of UK mobile infrastructure, including the rollout of 5G. However, several years on from the prohibition, the existing network sharing arrangements may be less of an obstacle to a similar merger proposition. Firstly, Beacon and MBNL are less integral to operator’s 5G deployments than previous generations, being used for passive infrastructure assets outside larger cities in Beacon’s case. Secondly, MBNL is due to terminate on 31 December 2031 - and could end sooner should the parties agree. As the CMA would still be minded to explore the potential for anti-competitive effects, Three and Vodafone may consider putting forward behavioural remedies to safeguard against commercial information exchange or coordination.
A merger would reduce competition at the wholesale level and likely require commitments
A potential theory of harm that could arise during a Three/Vodafone merger review relates to the wholesale mobile market. A deal between the two parties would reduce the number of operators able, and potentially willing, to provide wholesale access to MVNOs, which rely on their host’s infrastructure to offer communications services downstream. In blocking the O2/Three deal, the EC said that this situation would leave prospective and existing MVNOs in a weaker position to negotiate favourable wholesale access terms. As a concession, Hutchison offered access to a share of the merged entity’s network capacity to one or two MVNOs; however, the EC considered that the behavioural remedies were commercially unattractive and raised significant uncertainty as regards effective implementation.
The CMA supported this view, arguing that the transaction would have reduced the incentives for Three to compete aggressively to win MVNO customers and ultimately hindered effective competition in wholesale mobile. The CMA might consider that a combined Three/Vodafone could foreclose supply to retail rivals (in particular certain multi-play providers), or degrade their service. Following O2’s merger with Virgin Media and its revised agreement with Sky, and TalkTalk’s exit from the mobile market, this suggests limited concerns for nationwide fixed-line players. However, the CMA might still view the merged entity as having the ability and/or the incentive to foreclose the supply of wholesale mobile services to other MVNOs. As such, it may require some commitments to protect downstream competition, including a reservation of network capacity.
The risk of consumer price rises could be a red flag, and is probably the most contentious issue
A Three/Vodafone deal would give rise to horizontal overlaps in the retail mobile market, with the combined unit accounting for significant proportions of both subscribers and revenues. For the parties, a merger could represent a chance to improve the financial outlook as they invest heavily in 5G. Some competition bodies appear more receptive to this argument, while Ofcom has stated that it would assess any consolidation in mobile on the “specific circumstances” of the case, rather than on the number of networks. That said, Ofcom has previously highlighted Three's role as a disruptor that challenged established players through innovation and low pricing. Similarly, the CMA viewed Three as an important competitive force, especially in the high-data segment, and raised concerns that the merger would allow the enlarged operator to raise prices for UK consumers.
In blocking the proposed transaction, the EC argued its analysis showed that Three acquiring O2 would have resulted in higher mobile prices for all UK operators, as well as reducing consumer choice, quality of service and the incentive to compete with EE and Vodafone. While Three has sought to shake off its challenger reputation and strategically reposition, there has been heated debate around studies that have attempted to quantify the retail price impacts of mergers in other European mobile markets (such as Ireland). Consequently, in considering whether horizontal overlaps could have an adverse impact on competition, we can expect consumer prices to be top of mind for the CMA, particularly given the current cost of living crisis. As O2 and Three proposed to freeze prices for five years in a bid to gain regulatory clearance, we would expect Three and Vodafone to concede similar or suggest legally-binding commitments relating to investment or employment to try to help get a deal through.
