Vodafone has confirmed it is in talks with CK Hutchison, owner of rival telecoms group Three, to combine their UK businesses and create the biggest mobile operator in the country.
In a statement on Monday, Vodafone said it would own 51 per cent of the combined business and Hong Kong conglomerate CK Hutchison 49 per cent. Vodafone UK and Three UK are at present the third and fourth largest mobile operators in Britain.
“As [regulator] Ofcom has identified, some operators in the UK — Vodafone UK and Three UK — lack the necessary scale to earn their cost of capital,” the statement said. “By combining our businesses, Vodafone UK and Three UK will gain the necessary scale to be able to accelerate the rollout of full 5G in the UK and expand broadband connectivity to rural communities and small businesses.”
Vodafone’s share price rose 2.5 per cent in morning trading, to 104p.
The company has been under pressure from activist investors to change strategy and improve shareholder returns.
Earlier this year, Europe’s largest activist investor, Cevian Capital, bought an unspecified stake in Vodafone and has been pushing for it to pursue deals that would allow it to simplify its sprawling international business and sell off poorly performing divisions.
Last month, French billionaire Xavier Niel built a 2.5 per cent stake in Vodafone, adding to the pressure to shake up the business and improve returns.
The merger is very likely to be scrutinised by the UK’s Competition and Markets Authority.
Telecoms executives thought regulators had become more sympathetic to the prospect of mergers to facilitate investment in network infrastructure, but high inflation has bought worries about rising consumer prices to the fore.
“Bulking up would offer many synergies and cost-saving opportunities,” said Kester Mann, an analyst at consultancy CCS Insight. “It would be up to the competition authorities to decide whether reducing the number of players is for the overall good of the market. Advocates will argue it encourages investment; dissenters will claim it’s a reason to push up prices.”
Operators in the UK have been criticised recently for increasing prices significantly above inflation and failing to advertise cheaper tariffs, at a time when millions of people are struggling with rising costs.
European telecoms groups have not performed very well over the past decade, in a highly competitive market with pro-consumer regulation. Vodafone’s share price is down more than 11 per cent since the start of the year, and more than 50 per cent over the past five years.
Three UK has struggled to expand for several years. Its revenue in the first half of the year was flat compared with the same period last year.
Vodafone’s chief executive Nick Read has said he wants to pursue deals to consolidate in competitive markets such as Spain, Italy, UK and Portugal.
On Friday, the company announced an agreement to buy Portuguese telecoms operator Nowo from Spanish operator MasMovil.