Vodafone Group PLC (LSE:VOD) and Three UK continue to face “extremely difficult” hurdles in their quest to combine, Three's Hong Kong-based parent company CK Hutchinson said on Tuesday.
CK Hutchison’s finance chief Frank John Sixt told shareholders the merger is “probable” and that “we will reach an understanding with our friends at Vodafone”, but warned that it was “extremely difficult to draw a conclusion” on how the merger will play out.
Though Sixt did not provide more context, he was likely referring to pushback from British MPs and scrutiny from the UK’s competition watchdog on national security grounds.
Vodafone’s long-running ambition to merge its operations with Three UK, which would create a £15bn entity comprising £9bn in equity and £6bn in debt, with Vodafone becoming the 51% majority owner, could be blocked under the National Security and Investment Act, introduced in 2021 to identify and manage national security risks of international mergers and acquisitions.
Three UK, which reported its first-quarter results yesterday, is struggling with negative returns on its cost of capital, with Sixt noting that “market structural change is needed”.
Meanwhile, UBS analysts recently underscored Vodafone’s issues on the European continent, particularly subscriber losses and declining service revenues in Germany, and no clear trajectory to return to near-term growth.
But the analysts still see Vodafone stock as undervalued, suggesting that “M&A could potentially unlock value (and) support the share price”.
However, they added that “the key driver of investor sentiment will be evidence that operational trends are improving in their largest unit, Germany”.
Deutsche Bank’s head of European TMT research Robert Grindle estimated the deal could be worth £5bn of net present value synergies for Vodafone and a 10-15% upside on the group’s lagging share price.
But the sounds of it, the long-running mission to combine Vodafone and Three UK couldn’t come sooner for both parties.