Analysis: Vodafone and Hutchison's UK mobile merger faces tough test yet

Liberty Global

15/06/2023 07:00

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      UK regulator that blocked Microsoft-Activision deal to
scrutinize tie-up
    

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      Previous consolidation attempt by Hutchison, O2 was not
allowed
    

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      Companies say deal will deliver 5G network Britain needs
    

  
    By Paul Sandle
       LONDON, June 15 (Reuters) - It has taken months of
tortuous negotiations for Vodafone  VOD.L  and CK Hutchison
 0001.HK  to agree a deal to create Britain's biggest mobile
operator, but from a regulatory standpoint the hard work is only
just beginning.
    The $19 billion tie-up will be scrutinised by Britain's
Competition and Markets Authority, the antitrust regulator which
made global headlines in April when it blocked Microsoft's $69
billion acquisition of "Call of Duty" maker Activision Blizzard.
    The long-awaited mobile deal reduces the number of networks
from four to three, challenging a tenet long held by regulators
that four help to keep prices low in major markets.
    Hutchison tried to buy Telefonica's  TEF.MC  O2 network
seven years ago, but the deal - already opposed by Britain's
telecoms regulator Ofcom - was blocked by the European
Commission on the grounds that it would damage competition.
Legal wrangling about that decision continues.
    Any UK ruling is likely to take well over a year.     
    Analyst Paolo Pescatore at PP Foresight said the tie-up will
be a hard sale given that both Vodafone and Hutchison's Three UK
 have been outperforming the market for the last year or so.
    "Both parties need to demonstrate that this is genuinely in
the interest of UK plc, the economy, and consumers for it to
have a chance of getting over the line," he said.
    Aware of the hurdle ahead, Vodafone and Hong Kong-based
Hutchison put the emphasis on an 11 billion-pound 5G plan they
pledged to deliver over 10 years for Britain, rather than more
profit for shareholders.
    Customers will be no worse in terms of bills and will be
better in terms of network performance, they said.
    Victoria Scholar, head of investment at interactive
investor, said securing regulatory approval could be "a tall
order given the likely concerns over diminished competition and
consumer choice".
    Peter Broadhurst, a partner in the antitrust and competition
group at Crowell & Moring, said the CMA had become more
interventionist in the last three years. However, he thought it
would look for remedies to approve the deal.
    "If you want to get 5G then you have to make investment, and
at the moment the mobile network operators can't make the
margins in order to be able to afford that investment because
they don't have the scale," he said. 
    "Therefore, you have to allow some sort of consolidation."
    The government said in April it wanted to create a
pro-investment framework to deliver standalone 5G. There was no
"magic number" of mobile operators, it said, although it added
that all decisions on consolidation were for the CMA.
   Those comments came shortly after a meeting between top
Hutchison executives and government officials, sources have told
Reuters.
    
    MORE AMENABLE
    James Gray, managing director of Graystone Strategy, said
the telecoms landscape had changed over the past few years and
that would probably make the CMA more amenable.
    "The government's desire to make the UK a 5G powerhouse
requires a lot of investment," he said.
    The CMA, however, showed it was not afraid to assert its
independence with Microsoft-Activision, while Europe approved
that deal, and its boss Sarah Cardell said in February that the
risks from anti-competitive deals should not be understated.
    The companies will also need to secure approval under a
National Security and Investment Act, which gives the British
government powers to intervene in deals that could pose a risk.
    One of Britain's biggest unions, Unite, has already warned
that a company so close to China should not have a leading role
in telecoms infrastructure. 
    Three UK boss Robert Finnegan said he did not see any issue
because it already complied with security rules. "This is going
from 100% ownership to 49%," he said.
   The timing of the deal could also cause complications, as it
comes as millions of British customers on all four networks
digest double-digit rises in their bills amid an inflationary
environment. 
    But competition in Britain has been boosted by the mobile
virtual network operator (MVNO) and wholesale market, which
enables operators like Tesco Mobile and Sky to piggy back on
existing networks, Gray said.
    One London-based investment banker, who declined to be
named, said he put the chance of the deal receiving the green
light from regulators at 50%.
    A major telecoms investor said the deal could be approved,
but only with strong remedies, and that could risk undermining
its rationale. 
    They said a likely remedy could be similar to what happened
in a four-to-three merger in Germany in 2014, when Telefonica
had to sell up to 30% of the merged groups' capacity, allowing
up to three new MVNOs to enter the market. 
    

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FACTBOX-Vodafone, Hutchison UK merger to create country's
largest mobile operator      urn:newsml:reuters.com:*:nL4N3861NY
BREAKINGVIEWS-Vodafone’s do-or-die UK deal is a risky bet   
 urn:newsml:reuters.com:*:nL8N3863YI
Vodafone CEO secures early win, but long road ahead on the deal
front     urn:newsml:reuters.com:*:nL8N3864DV
    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
 (Reporting by Paul Sandle, additional reporting by Amy-Jo
Crowley and Sinead Cruise, Editing by Kate Holton and Emelia
Sithole-Matarise)
 ((paul.sandle@thomsonreuters.com; +44 20 7542 6843; Reuters
Messaging: paul.sandle.thomsonreuters.com@reuters.net))