Vodafone merger: VOD stock jumps on talks with Three to form telecoms giant

Vodafone (VOD) confirmed this week that it is in conversation with rival Three for a potential merger.

The deal would involve both companies merging their UK businesses. Hong Kong-based CK Hutchison would own 49 per cent of it while Vodafone would keep 51 per cent. To avoid cash being handed over the deal would be through a transfer of debt. Three, owned by CK Hutchison Holdings limited (0001) , would own 49% of the combined business if it were to go ahead. While Vodafone will have majority control with 51%.

The aim of the merger is to control costs of rolling out 5G across the UK, says Vodafone.

Vodafone (VOD) Price Chart

In the official statement Vodafone (VOD) said:

By combining our businesses, Vodafone UK and Three UK will gain the necessary scale to be able to accelerate the rollout of full 5G in the UK and expand broadband connectivity to rural communities and small businesses.

“The merged business would challenge the two already consolidated players for all UK customers and bring benefits through competitively priced access to a third reliable, high quality, and secure 5G network throughout the UK.”

Vodafone currently has a market capitalisation of £28.7 bn while CK Hutchison (0001) has a market capitalisation of £21bn.

Danni Hewson, AJ Bell financial analyst said in a note: “A mashup of the UKs third and fourth biggest mobile networks would give them the firepower to dominate the 5G rollout and eclipse the current market leaders.”

CK Hutchison Holdings limited (0001) Price Chart

But will the regulatory bodies approve？

This kind of a merger attempt is not the first of its kind in UK phone operator history. Three has previously tried to make a deal with O2 for £10.25bn back in 2016. At the time the deal was blocked by the European Competition Commission.

They said at the time: “We want the mobile telecoms sector to be competitive, so that consumers can enjoy innovative mobile services at fair prices and high network quality.”

And added: “Allowing Hutchison to takeover O2 at the terms they proposed would have been bad for UK consumers and bad for the UK mobile sector. We had strong concerns that consumers would have had less choice finding a mobile package that suits their needs and paid more than without the deal”

Hewson comments on this issue: “Whether it would be good news for customers is something the competition watchdog will have to consider carefully, but the technology required to keep us better connected is expensive. Pooling resources would help generate better returns for investors and unlock a better service for users.”

However, by 2020, the decision of the O2 merger was overturned. By that point the deal moved to a different combination, O2 merging with Virgin media. The European watchdog likely confirmed this deal mainly due to the timing. The slow economic growth in 2020 pushed the authority to make a lenient decision to allow the European market to keep producing.

The current deal between Vodafone and Three allows for a similar cost cutting measure, and permits for both entities to keep competing, which may tilt the regulatory decision in their favour.