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

The U.K.’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 — announced 15 months ago — could lead to higher prices for consumers, diminished service such as smaller data packages in contracts, and reduced investment in U.K. mobile networks.

The CMA also took aim at the market for mobile virtual network operators (MVNOs) — a set up aimed at increasing competition by enabling new carriers to set up and offer services without building all of their own costly communications infrastructure. Both Three and Vodafone supply network to MVNOs, with the list including iD Mobile and Lebara. The CMA said that a merger might make it more difficult for MVNOs to access reasonable wholesale deals, in turn making services more expensive for customers.

Competition concerns aside, 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, leading some to argue that Three could be compelled to share sensitive data with the Chinese state. The U.K. 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 U.K. entities and Chinese companies.

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

Scrutiny

A deal of this magnitude was always going to attract regulatory overview, given that it would reduce the U.K.’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 U.K. 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 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 the deal is complete.

Remedies

Today’s decision is provisional, and the regulator has now initiated a formal period with suggested remedies for the parties to address its 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 added 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 their network investment plans, as well as time-limited protections for its retail customers (e.g. MVNOs) during the initial network integration phase, so that prices and terms are not adversely impacted. This could also involve wholesale market remedies such as network capacity ring-fencing for MVNOs.

Smith said that the CMA rarely changes its mind between its provisional and final decision, “so the focus will now move onto 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 behavioural 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. They added they are willing for a previously promised £11 billion network investment to be independently monitored and enforced by Ofcom.

“The current U.K. 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 U.K.’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 U.K. customers, businesses and wider society.”