Vodafone Puts A Ring On It: Potential Merger with Three UK Under Works

You might have heard the rumours in 2021, but the telecommunications market now officially has a new romance on their hands. Vodafone and Three are looking to join forces!

V3 (the terribly catchy acronym I came up with myself and will be using for the rest of this piece) is set to be a merger, occurring in the form of a joint venture, with Vodafone holding onto 51%, while CK Hutchison, the legal owners of Three, will keep the remaining 49%.

Merger: The process of two separate legal entities (in other words, companies) combining to form one.

Joint Venture: A commercial partnership agreement where two or more entities combine their resources, profits and risks.

Why Team Up?

Vodafone, for one, has been under a lot of pressure from activist hedge fund Cevian Capital, who made an undisclosed stake in Vodafone last year. As a shareholder, the fund has had a lot to say about Vodafone’s international expansion and network strategy in recent times, and has been advocating for an aggressive approach to consolidation in certain markets, including the UK. The push is not unfounded – Vodafone shares have not been performing at optimal levels for the last 5 years.

The two mobile operators have also not kept how difficult they have found regaining the cost of their capital in the UK a secret. In fact, Ofcom, the nation’s communications regulator, is on the same page. Weighing in on the inability for UK operators to make decent returns on capital, Ofcom has accepted in the past that non-consolidated parties, like Three and Vodafone, have it much worse than the likes of every other company in the market that has converged.

Activist Hedge Fund: A fund that is a major shareholder in a company with the aim of ensuring shareholder value is unlocked by exerting pressure on the board of directors. 

Low Returns on Capital: In the context of this deal, this means that Vodafone and Three have received less money than they invested in building and expanding their networks.

When it comes to 5G, the advanced technology’s rollout has been occurring at a pretty slow pace in the UK. The implementation of 5G was reportedly delayed by 2 years due to the government requirement to remove all Huawei equipment installed up until that point – and there was a lot.

Further, Vodafone and Three have reported that their 5G growth has a ceiling, since both have no confidence in their abilities to grow organically enough to expand, and strengthen, their offering significantly. Vodafone has cited an accelerated roll-out of 5G as another motivating factor behind the partnership.

VS: The Pros and Cons

The Pros:


In the telecoms industry, size indeed matters. Success is often captured by the largest companies, in terms of market share and consumer base, in this market in particular. The simple fact of becoming bigger means that, through the economies of scale gained, Vodafone and Three have a fighting chance of competing fairly with rivals BT and Virgin Media, the remaining two market players who have already combined with EE and O2 respectively to gain more scale.


Vodafone has been heavily investing in 5G and the Internet-Of-Things, launching innovation centres, partnering with the government to create innovation incubators and creating private 5G networks for companies like Ford. In 2019, however, a test run in Birmingham showed that EE outstripped Vodafone by a significant amount in the 5G arena when it came to both its availability of the network and the speed of connection. It is clear that since then, Vodafone has continued to struggle in the UK market, and this merger could potentially change this for them.

Three, on the other hand, has been seeing great reports of their 5G network. Covering 56% of the UK population, Three has proved to be a worthy competitor for their much bigger rivals. However, it could still use much help with accessing more of the population, improving speed and unlocking the full potential of 5G technology.

Something that continues to hold 5G back is the cost and scale required to successfully implement it. The merger has the potential to overcome these financial hurdles. It is widely accepted, by Vodafone, Three and even Ofcom, that both companies are not able to grow organically in order to accommodate the phenomenal capital (money) and infrastructure needed to successfully introduce 5G networks. The economies of scale gained via a merger will lower costs of procurement and building the necessary network infrastructure.

The Cons:


Do you hear that? Those are the Competition and Markets Authority’s bells ringing in the not-so-far distance.

The first, and most predictable, obstacle facing the new V3 partnership is the UK’s Competition and Markets Authority (CMA) crashing the wedding.

The deal will form the UK’s largest telecommunications operator. V3’s combined customer base will be a whopping 27 million – considerably larger than Virgin Media’s O2 (24 million) and BT-owned EE (20 Million). V3 will own the lion’s share of the market, controlling 46% of all UK mobile spectrum, and there will be one less competitor to worry about as the market moves down to three market leaders.

Whilst this works out great for V3, the CMA won’t be quick to approve. The impact of the deal on consumers, other market entrants and existing competitors will be thrown into question. With the cost of living crisis going as it is now (swimmingly), there are fears that the CMA will clamp down hard on this mega deal due to the anticipation that it will lead to higher prices for consumers. Further, the shrinking of the market to three main providers may be depicted as a hinderance to competition, as has been the case for many deals that have taken global telecom markets to a 3-company split in the past.

Wait…Doesn’t This All Sound Familiar?

This isn’t Three’s first merger rodeo. In fact, Three was in this exact same position before 7 years ago. Prepare for a short story of heartbreak, frustration, betrayal and resilience…

In 2016, Three attempted to sweep none other than O2 off its feet. However, the European Commission, unhappy with the acquisition proposal due to its anticipated effect on market competition (more on this later), prohibited the merger.

Upset at the higher-ups dismantling their ideal partnership, Three appealed to the European General Court.

The Court ruled in Three’s favour in 2020, annulling the Commission’s initial ruling. To Three’s dismay, however, it looked like 4 years proved to be too long for O2 to wait for its betrothed, who had moved on to Virgin Media through a $39 billion deal. It wasn’t just O2 though, BT and EE eloped for $19 billion too.

So in 2022, who else was left to set its sights on but the one and only, Vodafone?

Will Three’s Day of Redemption Finally Come?

The overturning of the 2016 Three/O2 decision may have signified a turning of the tides when it comes to the consolidation and reduction of players in the telecoms industry. In its 2020 ruling, the General Court rejected the simplified understanding that a reduction from four to three mobile operators in a national market automatically impedes competition.

Even the assumption that a 4-player market is competition-friendly is disputed. Telco analysts have pointed out the fact that the UK mobile operator market is not large enough to accommodate more than four competitors, and so a reduction to three should be more than welcome. The CEOs of both companies have long been calling for the need to consolidate further in the telecoms market, warning that the strict regulatory mood towards big deals leading to a smaller number of providers is detrimental to service quality and has been the driving force behind impeded network investment.

Besides, Vodafone very cleverly regurgitated Ofcom’s own words (mentioned above) in explaining the motivations behind the merger – that there is only so much Three and Vodafone can achieve without joining forces.

Perhaps the CMA will concede with their peer?


Is a merger the answer to the problems Vodafone and Three are facing?

Take 5G for instance. Whilst the slow rollout is the outcome of high costs and scale, it is also attributed to a loose and vague definition of 5G itself. Many have said that until an industry standard is set globally, 5G implementation will remain fragmented and staggered.

Further, there is the question of customer demand – will it really be there following the merger? Might most customers opt for a cheaper 4G plan if the emergence of V3 will raise consumer prices for the alternative 5G plan? One thing is for certain – the future for 5G remains rocky, slow and misunderstood.

What Next?

The legal world will soon be lit up with the ins and outs of the proposed deal, whether it be the merger itself or the blocking of it by regulatory authorities. Law firms will be appointed to make sure the deal avoids breaching competition laws. Upon the approval of the deal, work will begin on all things M&A – the consolidation of customers, resources, infrastructure and everything else will have to be legally taken care of. The transfer of intellectual property rights, and creation of new ones depending on the name chosen (I vote V3 for obvious reasons) will be underway.

But will the regulatory tide shift directions? It may take one establishing an understanding that networks are imperative to the national infrastructure, and, for the sake of its advancement, some say this should trump the fact that prices may rise for consumers.

This article was written by Shreya Menon. Shreya is a Law LLB graduate from the London School of Economics and future trainee.


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