Interactive Investor

Vodafone and Three finally agree to UK merger

14th June 2023 12:01

by Victoria Scholar from interactive investor

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The deal will create the largest telecommunications operator in the UK.

Vodafone shares 600

After a prolonged wait, Vodafone Group (LSE:VOD) and CK Hutchison Holdings Ltd (SEHK:1) owned Three UK have confirmed plans to merge.

The tie-up would create the largest telecommunications operator in the UK with 27 million customers, knocking BT Group (LSE:BT.A)-owned EE off the top spot.

CK Hutchison said the merger will deliver up an economic benefit of up to £5 billion per year by 2030, while Vodafone estimates there will be substantial efficiencies of more than £700 million of the annual cost from the deal. Vodafone also said the deal has a net present value of over £7 billion.

Vodafone and CK Hutchison will own 51% and 49% of the combined entity respectively. The current chief executive of Vodafone UK Ahmed Essam will become the merged company’s CEO and Three UK’s CFO Darren Purkis will take on the role of group finance chief. The deal is expected to close before the end of 2024.

However, first the merger needs to secure regulatory approval, which could be a tall order given the likely concerns over diminished competition and consumer choice.

In 2016, the UK and European regulators blocked a takeover of O2 by Three, citing concerns about higher prices. However, Vodafone’s new CEO Margherita Della Valle insists this deal will be ‘great for competition.’

Shares in Vodafone have jumped following the announcement reflecting the excitement among investors about the benefits of this tie-up after longstanding talks since last year. This is likely to be Della Valle’s biggest accomplishment in the top job so far if the deal crosses the line.

Investors have fallen out of favour with Vodafone lately with shares down 40% over the past 12 months even after today’s jump. The FTSE 100 telecoms business has been grappling with intense competition in Europe’s largest economy, Germany where subscribers are falling, and services revenue is under pressure. It has also been having a tough time in Spain and Italy where mobile phone competition is fierce.

On top of that, like many businesses, Vodafone has been facing pressures from inflation, particularly energy bills which are driving up costs and make profitability more of a challenge. As a result, Vodafone has been targeted by activist investors such as French telecoms billionaire Xavier Niel who has been arguing for consolidation.

Perhaps this deal could reinvigorate Vodafone’s bull case amid hopes that the combined entity will benefit from its increased force in the sector and economies of scale to fend off competition.

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