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UK’s Telecom Titans Vodafone and Three Set to Merge in $19B Game Changer!

UK’s Telecom Titans Vodafone and Three Set to Merge in $19B Game Changer!

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UK Carriers Vodafone and Three to Merge

The UK and European mobile markets have undergone a period of consolidation and the next chapter in this story has been announced. Vodafone Group and Hutchison Group are set to merge their UK carriers – Vodafone and Three – in a deal that would make the combined company worth approximately £15bn (nearly $19bn). The proposed merger would result in a combined total of around 28 million subscribers, with Vodafone contributing 18 million and Three just over 10 million from May 2023.

No Cash Consideration

The proposed merger includes no cash consideration, and the resulting business will be valued at £15bn if today’s user numbers are taken into account. Details of debt from both businesses have also been included in the deal. Hutchison will own 49% of the new company, with Vodafone holding the remaining 51%.

Regulatory Approval Required

The two companies expect the merger to be finalized by the end of 2024, but it still requires regulatory approval. The integration of such large companies could prove difficult and the history of previous carrier mergers demonstrates that they often take years to resolve and may not work out as planned. In 2015, for example, Hutchison attempted to acquire Telefonica’s UK O2 business for £10.25bn in a bid that was quashed, appealed, and then quashed again as recently as April of this year.

Long-Awaited Merger

Both companies have been working on this latest plan for months to streamline their operations, build network economies of scale for 5G, and improve their margins as they both operate in a thin-margin business. Vodafone was the leading mobile carrier in the UK during the 1990s and early 2000s, but then lost that position to EE and O2. Three entered the UK market as a latecomer with the arrival of 3G in the late 1990s.

Questions and Disagreements

A limited mobile market means that consolidation is the only way forward for these companies as revenues from media services remain ambiguous. Carriers are losing out on owning the customer and making a cut on payments for those media services. The question of who should carry the cost of the service remains unanswered, leading to disagreements between carriers, tech companies, and media giants.

Merger to Unlock Significant Value

“Today’s announcement is a major milestone for CK Hutchison and for the UK. Three UK and Vodafone UK currently lack the necessary scale on their own to earn their cost of capital,” said Canning Fok, co-MD of CK Hutchison, in a statement. “This has long been a challenge for Three UK’s ability to invest and compete. Together, we will have the scale needed to deliver a best-in-class 5G network for the UK, transforming mobile services for our customers and opening up new opportunities for businesses across the length and breadth of the UK. This will unlock significant value for CK Hutchison and its shareholders, realize material synergies, reduce net financial indebtedness and further strengthen its financial profile.”

Substantial Efficiencies and Network Investment

The deal is expected to save the companies more than £700mn annually in capex and cost synergies by the fifth year post-completion, with an NPV of over £7bn. The companies intend to commit £11bn to build more infrastructure in the UK over the next decade, with a focus on 5G. They will also expand their fibre network for fixed broadband access and aim to cover 82% of households by 2030.

FAQs

What will be the ownership structure of the new company?

Hutchison will own 49% of the new company, with Vodafone holding the remaining 51%.

When is the merger set to be completed?

The companies expect the merger to be completed by the end of 2024, subject to regulatory approvals.

What will be the result of the merger?

The companies say the merger would result in a combined total of around 28 million subscribers, giving both companies much greater economies of scale when it comes to building out costly network for 5G and beyond, as well as in operating it. The combined business would be worth some £15 billion.

What is the motivation behind the merger?

The carriers are seeking greater economies of scale when it comes to building out costly networks for 5G and beyond as well as improving their margins in a thin-margin business.

What are the potential roadblocks to the merger?

The integration of such large companies could prove difficult, and the history of previous carrier mergers demonstrates that they often take years to resolve and may not work out as planned. Regulatory approval may also take time to come through.

What benefits are expected from the merger?

The deal is expected to save the companies more than £700mn annually in capex and cost synergies by the fifth year post-completion, with an NPV of over £7bn. Furthermore, Hutchison and Vodafone intend to commit £11bn to build more infrastructure in the UK over the next decade, with a focus on 5G. They will also expand their fibre network for fixed broadband access, aiming to cover 82% of households by 2030.

What is causing tension between carriers, tech companies, and media giants?

Carriers are missing out on owning the customer and making a cut on payments for media services. The question of who should carry the cost remains unanswered and there are disagreements over how much carriers should receive in revenue from media service providers. This uncertainty has led to disputes between carriers, tech companies, and media giants.

What is the significance of this merger?

The merger of Vodafone and Three is the latest in a long-term course of consolidation in the European and UK mobile markets. The limited mobile market necessitates consolidation to improve margins. The combined company would have approximately 28 million subscribers, giving both companies greater economies of scale when it comes to building out costly network for 5G and beyond, as well as in operating it.

Conclusion

The proposed merger of Vodafone and Three is a significant development in the consolidation of the UK and European mobile markets. The merger could unlock significant value for the companies and significantly reduce net financial indebtedness. However, the road to completion may be bumpy, with regulatory approval and integration posing potential challenges. The companies are committed to investing £11bn in building more infrastructure in the UK over the next decade, with a focus on 5G and expanding the fibre network for fixed broadband access.

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