Shares in Vodafone Group PLC (LSE:VOD) advanced on Monday after it confirmed reports that it is in talks with the owner of Three UK about combining their British operations.
The envisaged transaction would involve both companies combining their UK businesses, with Vodafone owning 51% and CK Hutchison owning 49% of the combined business.
The relative ownership would be achieved through a differential leverage contribution at closing, and no cash consideration will be paid, Vodafone said.
Reports and speculation about a potential merger between the two parties have been circulating since last year and reigniting earlier this year.
By combining the 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 FTSE 100 group said.
It said a merged business would provide improved services and pricing to challenge Virgin Media O2 and EE, which it noted were also the products of mergers – with the recent merger of Virgin Media and O2 to produce Virgin Media O2, while EE was acquired by BT Group PLC (LSE:BT.A) after being created by the previous merger between Orange and T-Mobile.
A Vodafone-Three deal would eclipse Virgin Media O2 and EE and become the mobile phone industry’s biggest player by customer numbers, with roughly 27mln customer connections.
Under pressure
Vodafone chief executive Nick Read has been under pressure from shareholders to make a move in the industry after saying in March the company was pursuing mergers with rivals in multiple European markets, spurred on by more favourable signals from regulators.
CK Hutchison, the Hong Kong-based conglomerate, has been exploring a sale of Three UK for some time and has decided that a deal with Vodafone represents its best opportunity to help it play a role in market consolidation.
Several significant hurdles remain outstanding with the most imposing of these likely to be the regulatory scrutiny that a deal would face both from Ofcom, the UK telecoms industry regulator, and the Competition and Markets Authority (CMA).
Industry sources said it was "almost certain" that the CMA would want to launch a full-blown, or Phase-II, merger inquiry, with the majority of such investigations leading to deals either being blocked or requiring remedies such as asset sales.
One industry analyst suggested that the value of the combined Vodafone-Three UK business could be in the region of £12bn-£15bn.
With its shares having halved over the past five year, Vodafone has attracted the attentions of a number of strategic investors, with activist Cevian Capital pressuring the board to increase returns, and joined by a Middle Eastern investor and a French billionaire.