Vodafone and Three UK accelerate talks to dial up ‘merger’

Vodafone and the owner of Three UK have accelerated talks about a deal to combine their British operations, paving the way for the creation of the mobile phone industry’s biggest player by customer numbers.

Sky News has learnt that Vodafone and CK Hutchison are hopeful of striking an agreement by the end of the year to establish a joint venture or other form of business combination.

People close to the talks said the discussions had intensified in recent weeks after a period in which they were thought to have stalled.

CK Hutchison, the Hong Kong-based conglomerate, has been exploring a sale of Three UK for some time, having concluded that the operation – which has nine million customers – was sub-scale in a sector that carries huge capital investment requirements for developing network infrastructure.

It is said to have decided that a deal with Vodafone represents its best opportunity to help it play a role in market consolidation, with Vodafone’s chief executive, Nick Read, under pressure from shareholders to revive its flagging share price.

Insiders said on Monday that discussions between the two companies were now at a “relatively advanced” stage, though several significant hurdles remained outstanding and there was no certainty that a deal would ultimately be reached.

The most imposing of these is likely to be the regulatory scrutiny that a deal would face both from Ofcom, the telecoms industry regulator, and the Competition and Markets Authority.

Industry sources said it was “almost certain” that the CMA would want to launch a full-blown, or Phase-II, merger inquiry. Most investigations of this kind lead to deals being blocked or requiring remedies such as asset sales.

One Vodafone investor queried whether such remedies, depending upon their scale, could undermine the logic of a tie-up.

Concerns are also likely to be raised by rivals about the volume of spectrum owned by the combined group, with one analyst saying it would control 46% of all UK mobile spectrum.

Ofcom has hinted at a softer approach to consolidation among the UK’s leading mobile networks.

A deal would create a market-leading business, with roughly 27 million customer connections.

That would be bigger than Virgin Media O2, which boasted 24 million retail connections in July, and EE, which is owned by BT Group and has about 20 million customers.

Industry chiefs have been calling for regulators to allow the consolidation of the UK industry from four major networks – EE, O2, Three UK and Vodafone – to three, a move that would stoke concerns among consumer groups of price hikes during a huge squeeze on Britons’ cost of living.

Market sources say CK Hutchison has indicated during deal-related talks that it was seeking a valuation for Three UK of roughly £6bn, though that predated the sale of some mobile towers assets, so it was unclear if the figure remained current.

One industry analyst speculated on Monday that the value of the combined Vodafone-Three UK business could be in the region of £12bn to £15bn.

In recent months, doubts have intensified about Mr Read’s long-term position after a number of prominent investors acquired stakes in Vodafone.

The most recent of these was Xazier Niel, the French billionaire, who disclosed that he had built a 2.5% stake in the company.

Mr Niel said in an accompanying statement that he believed there were “opportunities to accelerate… the streamlining of Vodafone’s footprint”.

Cevian Capital, a major European activist investor, emerged as a Vodafone shareholder last year, while the state-controlled Emirates Telecommunications Group acquired almost 10% of the FTSE 100 company in May.

On Monday morning, shares in Vodafone were trading at just over 100p, giving the company a market capitalisation of about £30bn.

Its stock has fallen by 10% during the past year.

Vodafone and Three UK both declined to comment.