Summary
- Merger would develop new leader in British mobile market
- Vodafone in talks about forming a 51%-49% joint venture
- Deal structured using debt, with no cash consideration
- Vodafone shares jump 2.5%
Vodafone (VOD.L) is holding talks with CK Hutchison (0001.HK) about combining their businesses in Britain to develop a market-leading mobile network that could speed up the roll-out of 5G services and boost broadband availability.
Vodafone said on October 3 it would hold 51% and Hutchison 49% under the deal being ironed out, with the stakes attained by adjusting ownership of debt instead of exchanging any cash.
Merging Vodafone UK and Hutchison’s Three, Britain’s third and fourth biggest networks respectively, would develop a business with about 27 million mobile customers – more than current leaders Virgin Media O2 and BT’s (BT.L).
Vodafone said in a statement:
“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 two companies intend to reach an agreement by the end of 2022, according to a previous Sky report. Shares in Vodafone, which hit a two-year low earlier on Monday, closed up 2.5% at 104 pence.
Chief Executive at Vodafone Nick Read said in February the company was seeking mergers in multiple European markets to increase returns where players barely cover the costs of the capital needed to invest in networks.
Regulators have previously rejected deals that decrease the number of networks in leading markets from four to three, but there have been signals that the position has shifted since the COVID-19 pandemic.
Hutchison tried to acquire Telefonica’s O2 network in Britain seven years ago but was stopped by regulators. Telefonica proceeded to form a joint venture with Liberty Global’s Virgin Media, developing a fixed-line and mobile operator to challenge former incumbent BT.
Vodafone noted in a statement that regulator Ofcom had called Vodafone UK and Three UK sub-scale operators, which lacked the size to obtain their cost of capital and therefore could lag further behind the two market leaders.
Buy Crypto NowRead has maintained that the pandemic underscored the importance of fast and reliable networks, developing a “tailwind of engagement” with governments. Regulators, however, will be hesitant to authorize a deal that restricts competition during a cost-of-living crisis, with customers already hit by surging bills, analysts have said.
Vodafone said on Monday the merger could give rise to benefits through “competitively priced access” to better 5G network, for example for mobile virtual network operators. These players, which include Sky and Tesco Mobile, have amassed a substantial share of the British mobile market.
Vodafone Under Pressure
Read, under pressure from long-suffering investors to boost returns at the pan-European operator, had named Britain as one of four major markets that would profit from the merger.
Vodafone passed up a deal in Spain, where peers MasMovil and Orange are pursuing a merger to challenge Telefonica, while it declined an offer for its business in Italy from Xavier Niel’s Iliad earlier in 2022.
Niel obtained a 2.5% stake in Vodafone this month, attracting another possible activist to its register besides Cevian Capital.
($1 = 0.8944 pounds)
