The Competition and Markets Authority has this morning revealed their provisional view on the outcome of their in-depth Phase 2 investigation into the proposed merger between mobile operators Three UK and Vodafone. This warns that it will only be able to approve the deal if the pair agree to key concessions that protect consumer prices and network competition.
Under the originally proposed deal (here), Vodafone would retain a 51% slice of the business and CK Hutchison (Three UK) are to hold 49%. The agreement was promoted as something that would be “great for customers, great for the country and great for competition,” while also resulting in a major £11bn investment to upgrade the UK’s 5G mobile (broadband) infrastructure and network coverage.
However, some regulators, MPs and consumer groups promptly sounded a note of caution, particularly given the concerns over any potentially negative impacts upon competition (at retail and wholesale / MVNO) and consumer prices, which may result from having fewer primary network operators (three instead of four).
Some fears over job losses and national security (i.e. Three UK’s owner is often perceived as being closely tied to China) were also raised, although the government has since cleared the deal of any national security concerns (here) and job losses aren’t a matter for the relevant regulators. The CMA is thus solely focused on the competition side of things.
Recapping Phase 1
The CMA’s initial Phase 1 probe, which reported its findings in March 2024 (here), warned that the merger “could lead to mobile customers facing higher prices and reduced quality“. On top of that, the authority was also concerned that the deal “may make it difficult” for smaller mobile virtual network operators (MVNO) to negotiate good deals for their customers, by reducing the number of network operators capable of hosting them.
In addition, the CMA questioned some of the data and network commitments provided by the parties. For example, the authority said it “does not believe that there is detailed and verifiable evidence demonstrating that any customer benefits from any accelerated roll out of 5G SA would be timely, likely to materialise or sufficient to outweigh the Significant Lessening of Competition.”
Finally, and somewhat contrary to previous statements made by Vodafone and Three UK about being “sub-scale, unable to cover their cost of capital, and constrained in their ability to invest and compete effectively“, the CMA found that both operators were in fact “viable and competitive businesses and that they would continue to invest in their networks absent the Merger“. The CMA therefore believes that if the merger did not go ahead, both would in fact “continue to compete with each other, as well as with other mobile operators, in a broadly similar way as today.”
In the past, regulators have often opposed such deals, but in recent years both the government and regulators have softened their stance, which is partly due to a 2020 ruling by the European Court of Justice (here) – this found that having only 3 operators still made for a competitive market. But crucially, that judgment was recently over-turned on appeal to the EU’s highest court (here) and a final conclusion has yet to be reached.
Provisional Outcome of Phase 2
Suffice to say that everybody with an interest in this sector has been waiting patiently, with bated breath, for the CMA to conclude their in-depth Phase 2 investigation of the deal, and today we finally got at least part of the answer (these are provisional findings).
Overall, the CMA broadly echoed their conclusions to Phase 1, which highlighted concerns about the lessening of competition and risk of consumers paying higher prices. But they also acknowledged that integrating the Vodafone and Three UK networks could “improve the quality of mobile networks and bring forward the deployment of next generation 5G networks and services“.
However, the regulator similarly still “considers that these claims are overstated, and that the merged firm would not necessarily have the incentive to follow through on its proposed investment programme after the merger“. In short, the CMA has provisionally concluded that the “merger would lead to a substantial lessening of competition in the UK” – in both retail and wholesale mobile markets.
Stuart McIntosh, Chair of the Inquiry Group, said:
“We’ve taken a thorough, considered approach to investigating this merger, weighing up the investment the companies say they will make in enhancing network quality and boosting 5G connectivity against the significant costs to customers and rival virtual networks.
We will now consider how Vodafone and Three might address our concerns about the likely impact of the merger on retail and wholesale customers while securing the potential longer-term benefits of the merger, including by guaranteeing future network investments.”
The outcome was perhaps expected, since you can’t shrink the number of primary network operators from 4 to 3 without raising difficult competition concerns, but the attention will now switch to consulting on these findings and “potential solutions” to its competition concerns.
Several potential solutions have today also been set out in the CMA’s remedies notice. These include legally binding investment commitments overseen by Ofcom, and measures to protect both retail customers and customers in the wholesale market. But the CMA said it would “retain the option to prohibit the merger should it conclude that other remedy options will not address its competition concerns effectively“.
The potential approach seems to be one of a “partial divestiture remedy“, requiring the divestiture of or access to certain mobile network assets and radio spectrum (from either Vodafone or Three) in the UK. The aim of this remedy would be to enhance the competitive capability of an existing MVNO (i.e. virtual operators like iD Mobile etc.).
Alternatively, the parties could provide sufficient assets to enable a new provider to enter the market as an MNO and compete across all parameters of competition including network quality (the CMA recognises this is very hard to achieve and thus “may not be effective” as a remedy). Such a remedy “would likely also require a national roaming agreement” and ongoing support from the Merged Entity at a minimum.
The bar being set by the CMA today is high, particularly in terms of expecting Three UK and Vodafone to make their network coverage commitments legally binding or to help facilitate a new primary mobile operator (MNO), but these are not all insurmountable obstacles. Likewise, it was already widely expected that the merged company might have to divest some of their spectrum ownership to rivals to avoid holding a dominant position.
Naturally, Vodafone and Three UK both “disagree with the CMA’s Provisional Findings“, specifically that their merger raises competition concerns and could lead to price rises for customers. But rather than just disagreeing, they’ll instead now need to find an effective way of placating the CMAs concerns. On that point the pair said they are “confident we can address their concerns” and both operators have also said they’re “willing” for their network coverage pledges “to be monitored independently and enforced by Ofcom.”
Margherita Della Valle, Vodafone’s CEO, said:
“Our merger is a catalyst for change. It’s time to take off the handbrake on the country’s connectivity and build the world-class infrastructure the country deserves. We are offering a self-funded plan to propel economic growth and address the UK’s digital divide.
Great network connectivity is a critical enabler of so many elements of our daily life and is central to the future prospects of so many sectors. Businesses large and small are dependent on it and it enables new industries – like AI – to thrive. It facilitates a step change in productivity and care across the public sector, and it lies at the heart of every nation’s future prosperity.”
Robert Finnegan, CEO of Three UK, said:
“The current UK 4 player mobile market is dysfunctional and lacks quality competition with 2 strong players and 2 weak players. This is reflected in the current state of the UK’s digital infrastructure that everyone agrees falls well short of what the country needs and deserves. We are determined to reassure the CMA in relation to their provisional concerns and work with them to secure the extensive benefits this merger brings for UK customers, businesses and wider society.”
The operators and other interested parties will now be given a chance to make representations on these Provisional Findings by no later than 4th October 2024. The deadline for a final outcome is currently 7th December 2024. At present we think the odds are fairly good that a solution can be found that will enable the merger to proceed, albeit not without some sacrifice.