Vodafone’s talks with Three over merger in the UK

TELECOM giants Vodafone Group and Three are considering a merger of their UK divisions, according to City sources.

The combination would be a joint venture with ownership split equally between the two groups, the sources said.

It would bring together the third and fourth largest mobile network operators in the UK behind BT’s EE and Virgin Media O2.

Three UK’s Hong Kong owner, CK Hutchison, would likely inject a lump sum of cash into the venture, in part due to its smaller size, the sources said.

It is understood a merger between the pair was due to be announced at Vodafone’s full-year results in May but the process has been delayed.

Vodafone had revenue of £6.6billion last year, while Three UK’s revenue stood at £2.5billion.

Speculation that Vodafone is considering a partnership with Three UK has been ongoing since Europe’s largest activist investor, Cevian Capital, emerged with a stake in the group earlier this year.

Cevian has called for mergers and acquisitions in key markets, including the UK, to improve Vodafone’s ailing share price.

Vodafone chief executive Nick Read last year said he was in favour of consolidation in the UK.

Hutchison has been keen to offload Three UK for a while, having struggled to generate returns on the investment, City sources said. One said its owners may even close the business if a solution is not found.

He added that telecoms firms already had sizeable energy bills and the recent rise in energy costs will have piled further pressure on Three UK’s financial performance and it is ‘feeling the squeeze’. Industry watchers are hoping for the UK Competition and Markets Authority to follow the European Union’s lead in allowing telecom mergers.

A merger of Vodafone and Three in the UK would mean the number of dominant players would be reduced from four to three.

But City lawyers are doubtful the CMA would clear any deal, saying its outlook on mergers has not changed since the attempted linkup of O2 and Three UK, when it expressed ‘serious’ concerns to the European Commission about the impact on UK consumers.

Analysts at Assembly Research expect prices would be ‘top of mind’ for the CMA when assessing any merger or partnership between Three and Vodafone, ‘particularly given the cost of living crisis’.

Vodafone, Hutchison and Three UK were contacted for comment.