The pressure is on for the merging parties to evidence the benefits of the deal and outline a meaningful set of commitments
BT sets out three main concerns with the proposed tie-up
On 13 June 2024, the Competition and Markets Authority (CMA) published responses to its issues statement for the Phase 2 review (which outlined the scope of the inquiry and initial theories on how the deal might harm competition) of the proposed Three/Vodafone merger in the UK. 10 stakeholders provided feedback, including BT, which communicated its support for the CMA’s Phase 1 conclusion that the transaction gives rise to a realistic prospect of a substantial lessening of competition. BT’s concerns arise from three issues:
Asymmetry: That the merged entity would have a disproportionate share (~61%) of the country’s mobile capacity and spectrum – a level that would be unprecedented in UK and Western European markets;
Commercially sensitive information: That the entity would have access to commercially sensitive information (e.g. investment plans) of BT through MBNL, the network sharing joint venture between BT and Three; and
Network disruption: That a combined Three/Vodafone would be able to frustrate the workings of MBNL and would have the incentive to do so post-merger, impacting BT’s ability to compete.
BT considers that, as result of the combination of these three issues, the merger would significantly reduce competition, ultimately resulting in higher retail prices, poorer network quality and reduced incentives to invest. “Company B” (a confidential respondee, understood not to be Virgin Media O2 who didn’t respond to the issues statement but would have already engaged with the CMA separately) echoed BT’s sentiments regarding information exchange, adding that the potential for even closer network sharing after the merger could reduce operators’ ability to differentiate their service offerings, which would reduce consumer choice.
While some stakeholders suggest remedies to mitigate the impact on competition, Unite wants the deal blocked altogether
Consumer group Which? also agreed with the CMA’s Phase 1 decision i.e. that the deal poses a substantial risk of higher prices and lower quality for consumers, as well as worse terms for MVNOs that will weaken competitive pressure on the established mobile network operators. Which? argues that “credible preventative remedies” are needed if the merger is to proceed. “Company A” (a full fibre altnet) suggested that a remedy that ensures attractive wholesale pricing would safeguard low-cost access for existing MVNOs and may encourage fixed broadband providers to add a mobile component to their proposition. “Company Z” recommended the CMA look to create a fourth non-nationwide operator to offset the loss of infrastructure competition post-merger. While citing Germany, Japan, Spain and the US as countries where this has taken place, the respondent’s advice on the approach the CMA should take was redacted. Going a step further, Unite the Union reiterated a position it has made publicly that the deal should be blocked outright as it would lead to job losses, higher prices and profiteering, without delivering an uplift in investment. Interestingly, the union claims that the proposed transaction is already driving up mobile prices, reducing the UK’s competitiveness ranking. However, with respect to national security, Unite has suffered one setback. Despite previously raising concerns about national security implications relating to Three’s owner, CK Hutchison, the Government has already approved the merger under the National Security and Investment Act 2021 – albeit with certain conditions.
Ericsson highlights the benefits of a combined Three/Vodafone for scale, returns and network investment
Network equipment supplier Ericsson responded with a positive perspective on the merger, stating that it would foster a more sustainable market structure to secure a return on investment, while providing cost efficiencies and economies of scale to improve network coverage, capacity and quality of service. Gas distribution company Cadent – that has a long-established working relationship with Vodafone – is also in favour of the deal, believing it will support its future technology ambitions, which are based on increased automation across its mobile phone and Internet of Things (IoT) estate. Cadent urged the CMA to not only assess the potential impacts of the merger on the mobile market, but also to consider the role of 5G in the wider economy. Professor Stephen Temple (an academic from the University of Surrey’s 5G/6G Innovation Centre) was the sole individual respondent to the issues statement, concluding that the merger, subject to binding investment commitments, is the “only plausible option to re-energise mobile infrastructure competition” in the UK, which he states has been in decline for the past 20 years. He adds that the CMA's Phase 2 decision will be a “watershed moment” for the future quality of the country’s mobile networks.
The transaction is very unlikely to be cleared without commitments
The CMA is due to conclude its review by 12 October 2024 – an extension of 24 days on the initial timetable to allow CK Hutchison extra time to share certain information and documents requested by the CMA. The length of the Phase 1 decision (at 243 pages) surprised many, with the suggestion that it reflected the strength of opposition to the deal. However, an outcome to the investigation should not be presumed at this stage. Equally, the idea that the merger should be cleared unconditionally – as recently championed by Margherita Della Valle (CEO, Vodafone) – should be considered part of a negotiation tactic rather than realistic expectation. There are legitimate competition issues that the CMA should address, and it has the time and ability to do so through engagement with the merging parties and wider industry over the coming months. As such, there are three possible eventualities for the parties: approval with commitments, prohibition or Three and Vodafone abandoning the proposed merger. While attempting to calculate the odds of approval would be pure speculation, it remains feasible that an appropriate package of commitments, potentially including divesting spectrum, guaranteeing MVNO access and/or exiting network sharing agreements, could be defined that sees the deal cleared. Both Vodafone and Three will be presenting evidence of the advantages of the merger and meaningful commitments to offset competition concerns in tandem. It seems that one without the other may not be enough.
