Three and Vodafone’s $19B merger hits the skids as UK rules the deal would adversely impact customers and MVNOs

The UK’s antitrust regulator has delivered its provisional ruling in a longstanding battle to combine two of the country’s major telecommunication operators.

The Competition and Markets Authority (CMA) says that Three and Vodafone’s planned $19 billion merger could lead to higher prices for consumers, diminished service such as smaller data packages in contracts, and reduced investment in UK mobile networks.

Additionally, given that both Three and Vodafone make their infrastructure available to mobile virtual network operators (MVNOs) which further improves competition in the UK, the CMA said it was concerned that a merger might make it more difficult for MVNOs such as Lyca Mobile and Lebara to access reasonable wholesale deals, in turn making prices more expensive for their own respective customers.

Scrutiny

Three and Vodafone first announced their plans 15 months ago, though a deal of this magnitude was always going to attract regulatory overview given that it would reduce the UK’s mobile network operator (MNO) count from four to three (the others being O2 and EE) . The two companies had prepared for this eventuality, announcing at the time that they were allowing until the end of 2024 to finalize the transaction.

The CMA kicked off its initial “phase 1” probe in late January, progressing things to a full in-depth investigation in June having carried out a detailed market analysis and garnered industry feedback.

These findings concluded that competitive pressure ultimately helps keep prices low, and thus by reducing four main players to three this could drive prices up, with a combined Three / Vodafone entity becoming the largest UK carrier with a market share of almost one-third. On top of that, the CMA found that separate companies are more inclined to invest in network coverage to provide a differentiated service from the competition — in other words, less rivalry might lead to less infrastructure investment.

“This case has pitted an investment argument against a competition argument,” Tom Smith, former CMA legal director and now competition lawyer at London law firm Geradin Partners, said in a statement issued to TechCrunch. “The companies say they need increased scale in order to invest, but removing one of the four network operators would be expected to lead to price rises. The CMA has today said that the parties have failed to prove their investment argument sufficiently to offset the harmful effects of the merger.”

It’s worth noting that in its findings today, the CMA acknowledges that the merger, if approved, could improve the quality of mobile networks, but it’s not clear of the incentives to follow through on the investment once deal is complete.

Today’s decision is provisional, and the regulator has now initiated a formal period with suggested remedies for the parties to address their concerns. This includes structural remedies such as divestiture (selling off IP or parts off their businesses) — the CMA says it believes this is an unlikely option, as there is no obvious spin-off capable of being run as a standalone business. The CMA did point to another possible solution here, including a “partial divestiture” involving specific mobile network assets and spectrum to enhance the “competitive capability of an existing MVNO or provide sufficient assets to enable a new provider to enter the market as an MNO. “

However, the CMA adds here that a prohibition of the merger would be the most “comprehensive” solution to addressing its concerns overall.

Moreover, the CMA makes some behavioral remedy suggestions, including specific commitments around investments’ time-limited retail protections; and wholesale market remedies, with pre-agreed access terms for MVNOs including network capacity ring-fencing.

Smith said that the CMA rarely changes its mind between its provisional and final decision, “so the focus will now move towards the effectiveness” of the proposed remedies.

“The CMA has raised a range of possible remedies, including supervising the investment promises while protecting consumers from price rises in the meantime,” Smith said. “This type of behavioral remedy would be highly unusual in CMA merger cases.”

In a joint statement sent by Three and Vodafone, the companies said that they disagree that the merger would lead to increased prices, either in the consumer or wholesale markets. They also said that they are now reviewing the possible remedies and “look forward to working constructively with the CMA” on the different options proposed. It added that it’s willing for its previously promised £11 billion network investment commitment to be independently monitored and enforced by Ofcom.

“The current UK 4 player mobile market is dysfunctional and lacks quality competition with 2 strong players and 2 weak players,” Three CEO Robert Finnegan said in a statement. “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.”

There was at least one other potential roadblock to this merger. Three is owned by CK Hutchison Holdings, a Hong Kong conglomerate subject to a national security law introduced by China in 2020, with some arguing that Three could be compelled to share sensitive data with the Chinese state. The UK had introduced the National Security and Investment Act back in 2022 to cover such scenarios, and the government had previously used this law to block other deals between UK entities and Chinese companies.

However, back in May the UK government greenlighted the Three / Vodafone merger on security grounds, with some provisions, leaving the remaining regulatory concerns firmly in the CMA’s domain.