Vodafone and Three permitted to tie the knot – if they promise to behave

Vodafone and Three's proposed merger has been cleared by the UK's competition watchdog, as long as the pair commit to certain conditions. The move will create a third large-scale mobile operator, with the expectation this will offer greater competition for BT/EE and Virgin Media O2 (VMO2).

The Competition and Markets Authority (CMA) announced that the union of the two telcos should be allowed to proceed, if both sign binding commitments to implement their network investment plan, provide consumer price protections, and preset contractual terms for mobile virtual network operators (MVNOs) for three years.

This outcome had been signaled by the CMA for several months now, despite fears that the move will lead to inflated bills for customers and hit MVNOs by reducing the number of companies with physical infrastructure they can approach for deals to deliver their own services.

"It's crucial this merger doesn't harm competition, which is why we've spent time considering how it could impact the telecoms market," said Stuart McIntosh, chair of the independent inquiry group leading the CMA investigation.

"Having carefully considered the evidence, as well as the extensive feedback we have received, we believe the merger is likely to boost competition in the UK mobile sector and should be allowed to proceed – but only if Vodafone and Three agree to implement our proposed measures."

The deal is expected to formally complete during the first half of 2025, with Vodafone owning 51 percent of the post-merger entity ("MergeCo").

What "MergeCo" will officially be known as is yet to be decided, according to a Vodafone spokesperson, who told us that the two firms are not allowed to formally engage on details like that until the transaction is approved.

However, Voda has stated that after three years, it may acquire the remaining 49 percent stake of the company from Three's parent, CK Hutchison, subject to certain conditions, which would effectively make it Vodafone.

In a statement, Voda's CEO Margherita Della Valle claimed that the approval "releases the handbrake on the UK's telecoms industry," promising that "consumers and businesses will enjoy wider coverage, faster speeds, and better-quality connections across the UK, as we build the biggest and best network in our home market."

On Three's behalf, CK Hutchison Group Chairman Canning Fok said: "When Three and Vodafone are combined, CK Hutchison will fully support the merged business in implementing its network investment plan, the cornerstone of today's approval by the CMA, transforming the UK's digital infrastructure and ensuring customers across the country benefit from world-beating network quality."

That network investment plan involves pumping £11 billion ($14 billion) into merging and improving the infrastructure of the two operators over the next eight years. This will entail upgrades to support 5G Standalone (5G SA) capabilities and extending its reach to cover 99 percent of the UK population.

The CMA wants legally binding commitments to this as it has previously expressed doubts that Vodafone and Three would deliver on the full package of improvements otherwise.

It also wants binding commitments to cap selected mobile tariffs and data plans for three years to protect customers from price rises in the immediate post-merger era, and also preset prices and contract terms for wholesale services over the same period to protect MVNOs.

Both the CMA and Ofcom will oversee this commitment, and the conjoined entity will be required to publish an annual report setting out its progress on the implementation of the network plan.

This outcome has largely been met with qualified approval, mostly because the most strident critics during the consultation period appear to be keeping silent – for now.

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"The CMA's decision to approve the merger is the right one and largely strikes a good balance between nurturing competition and encouraging investment. It should pave the way for more efficient investments to bring about much-needed improvements to mobile services in the UK," said Kester Mann, CCS Insight Director of Consumer and Connectivity.

He added that the outcome is "about as good as it could have got for Vodafone and Three. Not only did they secure approval, but the agreed remedies and commitments are less onerous than feared."

PP Foresight analyst and founder Paolo Pescatore warned that it will take many years before the full merits of the deal are realized, and there will be a lot of tough decisions to come in the meantime.

"Merging two networks is no easy feat. While there are past examples with BT/EE and VMO2 to draw upon, it's not going to be smooth sailing," he said, adding that it is a big deal for both players, especially for Three "given its business model would have been unsustainable in the long term."

Alex Haffner, competition partner at UK law firm Fladgate, expressed surprise that the CMA has settled for behavioral remedies only.

"Over the past decade a multitude of mobile network mergers across Europe have been permitted only on the basis of significant structural remedies being conceded by the merging parties. In doing so, the CMA has displayed a degree of pragmatism, sensing that consumers will ultimately benefit more from competition between three well-resourced mobile operators in the UK market," he stated.

Both BT/EE and Sky Mobile came out strongly against this merger being permitted during the consultation, but neither had anything to say when we contacted them.

The CMA said that the publication of its final report marks the end of its Phase 2 merger investigation. If Vodafone and Three agree to the commitments, the CMA will work to implement them; otherwise, it will simply block the deal.

Vodafone and Three said they will study the CMA's final report in detail, and will "continue to engage with the CMA as they put in place the final undertakings." ®