Despite competition concerns at the both the retail and wholesale levels, there’s still the possibility commitments could be agreed that get the deal the green light
Concerns the proposed merger could leave consumers and businesses worse off
On 22 March 2024, the Competition and Markets Authority (CMA) announced its decision following a Phase I review of the proposed Three/Vodafone merger. This initial investigation began on 26 January after CK Hutchison Telecom Holdings Limited and Vodafone Group officially notified of their intention to combine their UK businesses. Over 40 working days, the CMA considered whether the deal may lead to a ‘substantial lessening of competition’ (SLC), focusing on the potential impact on the country’s consumers and businesses. The prospect of an SLC would likely trigger an in-depth Phase II investigation that would give an independent panel of experts the chance to examine in more detail the provisional concerns identified at Phase I. The CMA is concerned that the deal, which would combine two of the UK’s four mobile network operators, could lead to higher prices for customers, while also impacting service quality and investment.
The CMA has identified three theories of harm
The CMA considers that the merger may be expected to result in an SLC in the supply of both retail and wholesale mobile services in the UK. It has found the deal raises competition concerns based on three theories of harm:
Horizontal unilateral effects in the supply of retail mobile services: This relates to the elimination of a competitive constraint by removing an alternative that customers could switch to and to a reduced incentive for the merged entity to compete aggressively compared to each party on a standalone basis;
Horizontal unilateral effects in the supply of wholesale mobile services: The CMA is concerned the merger would reduce the number of operators competing to host MVNOs, which also weakens the negotiating position of MVNOs; and
The merged entity may gain access to its competitors’ commercially sensitive information through its participation in both network sharing arrangements (Cornerstone and MBNL): This could include data on investments, information on deployment plans or technical specifications.
Insufficient evidence has been presented on the benefits of the deal
In announcing the merger in June 2023, Three and Vodafone said that combining their businesses would result in positive outcomes for consumers, competition and the country as a whole. The CMA states that it has considered whether there are ‘countervailing factors’ that prevent or mitigate any SLC arising from the transaction, including potential rivalry-enhancing efficiencies and relevant customer benefits. During Phase I, the parties made submissions to the CMA, which were based on a number of assumptions about future investment, including the number of sites and amount of spectrum deployed. However, the CMA believes these plans do not take into consideration the competitive landscape post-merger. It considers the parties’ assumptions therefore need a more detailed assessment, particularly in light of its concerns that the merger may provide an incentive for profit maximisation through reducing investment and/or increasing prices.
The parties anticipated a Phase II review
Three and Vodafone have five working days (until 2 April) to offer solutions to the CMA’s concerns, otherwise a Phase II investigation will begin, which could last up to 32 weeks. In a joint response to the Phase I decision, the parties stated that moving to a detailed review was “an expected next step in the process” and in line with their timeline for completion envisaged at the outset. It is entirely plausible that a set of concessions, for example spectrum divestment and/or an exit from network sharing agreements, could be agreed during Phase II that would see the deal approved. While spectrum was only mentioned twice in the decision summary, divestment of frequencies is a common mobile merger remedy and is likely to attract further attention in Phase II. In light of concerns about the wholesale market, the CMA might consider seeking commitments to protect retail competition, e.g. reserving capacity or better terms for MVNO access, including for those MVNOs already in the market with some scale. Given worries about the impact on consumers’ bills, the CMA (while typically not a fan of behavioural remedies) could also push for binding commitments on the parties not to raise prices for a given period. It is worth noting that O2 and Three proposed something similar back in 2016, but this was rejected by the European Commission. In any case, there is unlikely to be appetite for measures to facilitate a new entrant operator. Such a remedy, while used elsewhere in Europe, would undermine the rationale for the transaction in the first place.
