Vodafone-Three merger faces regulatory challenges

Vodafone and CK Hutchison have finally reached an agreement after months of difficult negotiations to establish the largest mobile operator in Britain, Reuters news report said.
Vodafone store UKHowever, the regulatory challenges are just beginning. The proposed $19 billion merger between Vodafone (51 percent) and Three (49 percent) will undergo scrutiny by Britain’s Competition and Markets Authority, the antitrust regulator known for blocking Microsoft’s attempted acquisition of Activision Blizzard for $69 billion earlier this year.

The long-awaited merger will reduce the number of mobile networks from four to three, challenging the longstanding belief held by regulators that having four networks helps maintain low prices in major markets.

Seven years ago, Hutchison attempted to acquire Telefonica’s O2 network, but the deal, which was already opposed by Britain’s telecoms regulator Ofcom, was blocked by the European Commission due to concerns about its impact on competition. Legal disputes regarding that decision are ongoing.

It is expected that a ruling by the UK regulatory authority will take well over a year. Paolo Pescatore, an analyst at PP Foresight, believes that the merger will be a tough sell, considering that both Vodafone and Hutchison’s Three UK have outperformed the market in recent years.

Paolo Pescatore emphasized that both parties need to demonstrate that the merger is genuinely in the interest of the UK’s economy, consumers, and overall national benefit in order for it to have a chance of approval.

Recognizing the regulatory hurdles ahead, Vodafone and Hutchison have highlighted their commitment to investing £11 billion in a 5G plan over the next decade for the benefit of Britain, rather than focusing solely on shareholder profits. They assure customers that their bills will not be negatively affected, and network performance will be improved.

Victoria Scholar, head of investment at interactive investor, suggests that obtaining regulatory approval may be challenging due to concerns about reduced competition and consumer choice. Peter Broadhurst, a partner in the antitrust and competition group at Crowell & Moring, believes that the regulator will likely seek remedies to approve the deal, considering the necessity for investment in 5G infrastructure.

In April, the UK government expressed its intention to establish a pro-investment framework for standalone 5G development. Although the government did not specify a specific number of mobile operators, it stated that decisions regarding consolidation would be made by the Competition and Markets Authority.

James Gray, managing director of Graystone Strategy, believes that the evolving landscape of the telecommunications industry in recent years may make the regulator more receptive to the merger. However, the CMA has shown its independence by blocking the Microsoft-Activision deal, even though it was approved in Europe. The CMA’s CEO, Sarah Cardell, previously emphasized the importance of not underestimating the risks posed by anti-competitive mergers.

Additionally, the companies will need to obtain approval under the National Security and Investment Act, which grants the British government authority to intervene in deals that could pose risks to national security.

Unite, one of the largest unions in Britain, has already expressed concerns about a company closely tied to China having a prominent role in the country’s telecoms infrastructure.

Robert Finnegan, CEO of Three UK, argues that the proposed deal does not pose a security issue since the company already complies with security regulations, and the ownership stake will be reduced from 100 percent to 49 percent.

The timing of the merger may complicate matters as customers across all four networks face significant price increases in an inflationary environment. However, competition in the British market has been bolstered by the presence of mobile virtual network operators (MVNOs) and the wholesale market, allowing operators like Tesco Mobile and Sky to utilize existing networks. According to Gray, this factor could work in favor of the merger.