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Vodafone UK confirms talks to merge with Three are underway

The deal is expected to close by the end of the year and could see the formation of the UK's second-largest mobile network operator

Vodafone UK has confirmed it’s currently holding talks with Hutchinson’s Three (Three) over a potential merger.

Under the terms currently being discussed, Vodafone would hold 51% of the new company's shares with Three holding 49%.

Vodafone UK and Three currently serve an estimated 17 million and 9.5 million customers respectively, according to last year’s figures, which means the proposed merged company would serve around 27 million.

This figure would place it second in terms of the total number of customers served in the UK with the recently consolidated Virgin Media O2 still leading with 32 million customers and EE serving the least with 26 million.

“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," said Vodafone in a statement provided to IT Pro.

The deal is expected to close before the end of the year, Sky News reported and will be paid for by adjusting the two companies’ debt ownership rather than through an exchange of cash.

Kester Mann, director of consumer and connectivity at CCS Insight, said getting regulatory approval for such a deal will be “a major hurdle”.

“It would be up to the competition authorities to decide whether reducing the number of players is for the overall good of the market,” he said. “Advocates will argue it encourages investment; dissenters will claim it’s a reason to push up prices.”

Vodafone and Three were previously identified by telecoms regulator Ofcom as two mobile network operators (MNOs) that lack the necessary scale to earn their cost of capital - the funds required to operate a business.

“The conditions to ensure thriving competition in the market need to be nurtured, otherwise the UK is at risk of losing the opportunity to be a 5G leader,” it added.

“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.”

The news comes following months of rumours that two of the four major MNOs in the UK. 

Three’s CEO Robert Finnegan has called for a restructuring of the UK MNO market for years, a view he re-iterated earlier this year calling the current market “dysfunctional”.

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Analysts at the time believed that a merger between Three and Vodafone was ‘likely’ and would benefit Three due to the growing importance of convergence.

Three has previously tried to grow through acquisitions back in 2015 when it tabled a £10.25 billion bid for O2, a move that was not greeted warmly by regulator Ofcom and ultimately blocked by the European Commission the following year.

“The leading motivation to join forces is scale,” said Mann. “In telecommunications, the most successful companies tend to be the largest; bulking up would offer many synergies and cost-saving opportunities. Under the status quo, it’s hard to see either operator growing enough organically to get close to challenging BT and Virgin Media O2 for size in the UK.”

“Not so long ago, a tie-up between Vodafone and Three would have felt like an unnatural pairing. But in recent times, Vodafone has taken on more of a challenger role in its home market, so the two operators’ strategies may no longer be too far apart.”

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