Vodafone Group Plc and CK Hutchison Holdings Ltd. agreed to combine their UK mobile businesses in a deal that will create the biggest wireless company in the country if it passes muster with regulators.
(Bloomberg) — Vodafone Group Plc and CK Hutchison Holdings Ltd. agreed to combine their UK mobile businesses in a deal that will create the biggest wireless company in the country if it passes muster with regulators.
Vodafone will own 51% of the new company and Hong Kong-based conglomerate CK Hutchison will control the remainder, the companies said in a statement on Wednesday. Vodafone will have the right to acquire the entire merged business after three years, if it reaches a value of at least £16.5 billion ($20.9 billion) including debt. The companies expect to close the deal before the end of 2024.
The takeover, coming more than a year after Bloomberg first reported the talks, will combine the two smallest of the UK’s four mobile operators, taking a competitor out and creating a new dominant carrier by mobile service revenue. The industry has struggled with stagnant returns in recent years, with 5G rollouts eating into profits. The combined business will invest £11 billion over a decade to create a standalone 5G mobile network, the companies said.
Instead of contributing cash, Vodafone and CK Hutchison’s local unit, Three UK, have agreed to take on £6 billion in debt. Vodafone will take £4.3 billion of that and Three UK will account for £1.7 billion, which will be refinanced, the companies said.
Vodafone shares rose 3% to 74.63 pence at 12:50 p.m. in London trading on Wednesday. The stock has declined 11% this year.
“For Vodafone, this transaction is a game changer in our home market,” said Vodafone Chief Executive Officer Margherita Della Valle. “This is a vote of confidence in the UK and its ambitions to be a center for future technology.”
The deal still needs to be approved, and the transaction will now enter months of tense regulatory review. Watchdogs rejected a similar proposal that would have combined Three with O2 in 2016. In a ruling before the UK left the European Union, the EU blocked the deal on antitrust grounds in an ongoing case that’s since been challenged in the courts.
The UK’s Competition and Markets Authority said Wednesday that it will review the deal.
What Bloomberg Intelligence Says:
Vodafone’s agreed merger of its UK unit with Hutchison’s Three shifts the focus to the antitrust review, which we think has higher odds of approval vs the past, given regulator Ofcom’s acknowledgment that these carriers earn returns below their cost of capital. The parties foresee a net present value of £7 billion cost synergies, which looks high to us, because it assumes annual savings of 11% of total cash costs, above the average of 7% from benchmark deals. The deal is leverage-neutral for Vodafone.
— Erhan Gurses and John Davies, BI telecoms and media analysts
“Both Vodafone and Three are key players in the UK communications market – with millions of consumers and many businesses relying on their services – so it’s right that the CMA reviews the impact this deal could have on competition,” a spokesperson said via email.
Analysts at New Street Research have estimated that the antitrust investigation from the UK’s Competition and Markets Authority and Ofcom could take as long as 18 months. Vodafone and Three compete against larger rivals BT Group Plc and Virgin Media O2 – which is jointly owned by Liberty Global Plc and Telefonica SA after they merged their British businesses in 2021. Unlike Vodafone and Three, BT and VMO2 also own fixed networks to sell consumer broadband.
The combined mobile business expects to incur about £500 million in integration costs, mostly in the first five years, and the companies estimate the deal will lead to more than £700 million in annual savings. Vodafone UK CEO Ahmed Essam, who will run the combined mobile business, said that there may be some “overlap” in employee roles after the merger, but declined to comment on numbers.
HSBC Holdings Plc and Moelis & Co. advised CK Hutchison on the deal. Morgan Stanley acted as Vodafone’s lead financial adviser, while Robey Warshaw also provided advice to the British company.
–With assistance from Katharine Gemmell.
(Updates with exit requirements, CMA comments from second paragraph)
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