The day has finally come, with the parties talking up the potential benefits for consumers, competition and the economy – but will the CMA agree?
Investment commitment will be music to the Government’s ears: Vodafone Group and CK Hutchison Telecom Holdings Limited (CKHGT) have today announced an agreement for the merger of Vodafone and Three in the UK. While a previous attempt at consolidation failed (i.e. O2/Three in 2016), the climate this time around feels less hostile and presents the best chance of getting a deal through. Vodafone Group will own 51% and CKHGT 49% of the combined entity, which has outlined a £11bn network capex plan for the next 10 years. Margherita Della Valle (CEO, Vodafone Group) has described the proposed transaction as being “great for customers, great for the country and great for competition”. Following the Government’s recent Wireless Infrastructure Strategy, the announcement (with its commitment to investment and jobs) comes at an opportune moment. Together, Three and Vodafone would be better equipped to deliver ultrafast, reliable and secure mobile connectivity throughout the UK – the exact thing the Government’s pro-investment strategy wants to see.
The CMA will review the proposed transaction on the merits: While the CMA has remained tight-lipped, DSIT and Ofcom have publicly expressed their openness to consolidation, recognising the challenging financial state of both operators, the investment required for 5G, the need for more resilient networks and the emerging competitive pressure from big tech. Nevertheless, it is the CMA that will be the decision-maker on the deal, with its forthcoming (perhaps as long as 18 months) review set to reveal how well the parties’ arguments have landed. The CMA’s assessment is likely to focus on a number of key issues, including spectrum holdings, networking sharing agreements, access for MVNOs and retail prices for consumers. Firstly, a combined Three/Vodafone will face calls from rivals to give up some of its enviable 5G spectrum holding. As divestment is a fairly standard mobile merger remedy, that shouldn’t be a barrier to getting the deal through. Neither should network sharing, with competition issues relating to existing agreements easier to overcome than in the past.
The effect on consumer prices will be important given the tough economic environment: Three and Vodafone might also be required to reserve a proportion of network capacity for MVNOs. This is something the parties should expect to have to offer – but it’s a far more palatable option than a carve-out of infrastructure to facilitate a new entrant (as was required in Italy in 2016 for the Wind/Tre merger to go ahead). However, given the ongoing cost of living crisis, the potential for higher consumer bills that a reduction in the number of competitors could bring will be a particularly contentious issue. The CMA will be keen to hedge the risk and so the commitment to ‘certain flexible, contract-free offers with no annual price increases’ will be of particular interest. Any demand for legally-binding commitments not to raise prices for several years would only increase the need for the merger to generate efficiencies. Finally, hostility from those seeking to sever ties with China is a political consideration, rather than an economic one, and so would sit with the Government to decide whether to intervene using its powers under the National Security and Investment Act.
