Posts tagged: antitrust

The U.K.’s Competition and Markets Authority (CMA) is launching a formal probe into the proposed merger between Vodafone and Three UK.

The news hardly comes as a surprise, given that the £15 billion ($19 billion) joint venture would reduce the U.K.’s main infrastructure-owning mobile networks from four to three (the other two being EE and O2), and the duo had already allowed until the end of 2024 for the deal to conclude. That is some 18 months from when they first revealed their plans back in June.

“This deal would bring together two of the major players in the U.K. telecommunications market, which is critical to millions of everyday customers, businesses and the wider economy,” CMA chief executive Sarah Cardell said in a statement. “The CMA will assess how this tie-up between rival networks could impact competition before deciding next steps.”

Market analysis investigation

Today’s news signals the start of what is known as a “phase 1” investigation, which will involve assessing whether a proposed merger will create a “substantial lessening of competition,” while gathering key data from the parties involved, competitors, customers, among other stakeholders. This initial market analysis phase can take up to 40 days, after which the deal may proceed to a more in-depth “phase 2” investigation which can last an additional six months — hence why Vodafone and Three had allowed themselves until the 2024 for the deal to be greenlighted.

“It was certain that the CMA would open a formal investigation — it is also certain to proceed to a full Phase 2 investigation,” Tom Smith, a former CMA legal director who’s now partner at London-based law firm Geradin Partners, explained to TechCrunch. “This means we should expect the CMA’s final decision in the Autumn.”

Three has in fact been in embroiled in one previous failed acquisition effort, when its parent company Hutchison tried to procure O2 in a £10.25 billion deal — this was kiboshed by EU regulators, though the deal reared its head again in 2022 when a European court adviser suggested the original court ruling should be dismissed. It’s not entirely clear how that might impact this latest merger attempt, but Smith reckons that deal is as good as dead, regardless of what any court might subsequently find.

“The previous Three/O2 merger is still technically going through the EU courts, but that deal is long since dead in reality,” Smith said. “The current deal will be reviewed on its own merits in any case.”

With a full phase 2 merger investigation a likely outcome here, it will be up to Vodafone and Three to convince the CMA that the benefits outweigh the reduced competition.

“We strongly believe that the proposed merger of Vodafone and Three will significantly enhance competition by creating a combined business with more resources to invest in infrastructure to better compete with the two larger converged players,” Vodafone UK CEO Ahmed Essam said in a statement. “Our commitment to invest £11 billion will build capacity to meet the exponential growth in demand for data and accelerate the roll out of Advanced 5G across the UK, delivering benefits to consumers and businesses throughout the nation.”

National security

It’s worth noting that there is in fact an additional regulatory aspect to this deal beyond competition concerns. On Wednesday, the U.K. Cabinet Office said that a 14.6% stake that United Arab Emirates (UAE) telecoms group called e& holds in Vodafone could pose a national security risk, and ordered a security committee to be set up at Vodafone to “oversee sensitive work that Vodafone and its group perform which has an impact on or is in respect of the national security of the United Kingdom.”

Three, meanwhile, is owned by CK Hutchison Holdings, a Hong Kong-based conglomerate that is subject to a national security law introduced by China in 2020.

“It has been clear for some time that the proposed merger will also have an additional regulatory dimension under the National Security and Investment Act given Three’s links to China via its Hong Kong ownership — and the impact of China’s national security law in Hong Kong,” Alex Haffner, a competition partner at U.K. law firm Fladgate, said in a statement. “This allied to the UAE company e&’s recent 14.6% stake in Vodafone, which has already undergone a security review by UK government under the Act, means that the merging parties now face high level governmental as well as regulator scrutiny of the deal.”

The U.K.’s Competition and Markets Authority (CMA) has confirmed that it’s launching a formal “phase 2” investigation into the planned merger between Vodafone and Three UK.

The CMA says that the deal could lead to higher prices for consumers, while also impact future infrastructure investments. However, the CMA has given both parties a token five working days to address its concerns with “meaningful solutions” before it formally progresses the investigation.

“Our initial assessment of this deal has identified concerns which could lead to higher prices for customers and lower investment in U.K. mobile networks,” Julie Bon, the CMA’s deputy chief economic adviser, said in a statement. “These warrant an in-depth investigation unless Vodafone and Three can come forward with solutions.”

The news comes some nine months after plans of the $19 billion deal first emerged, in a move that would effectively reduce the U.K.’s main mobile network operators from four to three (the others being EE and O2). The duo clearly anticipated regulatory headwinds, having already allowed until the end of 2024 to conclude the transaction. The initial “phase 1” probe kicked off at the tail-end of January, with the CMA conducting a market analysis to garner feedback from a multitude of stakeholders before deciding whether a formal investigation was warranted.

A deal of this size and consequence was always likely to go the full distance as far as regulatory scrutiny was concerned, so today’s news comes as little surprise. The CMA now has six months to carry out the investigation before reaching a final conclusion.

“It was inevitable that this case would be given an in-depth assessment by the CMA,” Tom Smith, partner at London-based law firm Geradin Partners and former legal director at the CMA, told TechCrunch. “The real work now starts for the companies in trying to prove the benefits of the merger to the CMA panel.”

Competition vs consolidation

One major bone of contention here is the impact that reducing a four-horse race to three will have in terms of consumer prices — as the CMA notes, “competitive pressure can help keep prices low.”

In its market study, the CMA concluded that a combined Vodafone and Three would become the largest carrier by revenue, with a market share of nearly a third. And due to this, it believes the combined company would have “less incentive to compete aggressively compared to each Party on a standalone basis.”

But also, the need to provide a differentiated service can also spur additional investment to improve network coverage and quality. With reduced rivalry, there is also less incentive to do so.

“Millions of people in the U.K. depend on effective competition in the mobile market in order to access the best deals for them,” Bon noted. “Whilst Vodafone and Three have made a number of claims about how their deal is good for competition and investment, the CMA has not seen sufficient evidence to date to back these claims.”

While Vodafone and Three have pointed to similar “four to three” merger studies to support claims that it won’t significantly impact prices, another notable study carried out in the wake of Vodafone Hutchison Australia and TPG’s merger in 2020 indicated that the three remaining mobile network operators all increased their prices — and overall, investment by the Australian carriers dropped by 45% between 2018 and 2023.

Separately, a report by anti-monopoly organization Balanced Economy Project drew on seven international studies to conclude that a Vodafone / Three merger would lead to consumer price increases from £5 to £25 a month

“The CMA’s pricing analysis will show that a post-merger price rise is likely, so the companies will need to persuade the CMA that they will pass on any cost savings to customers to offset the incentive to raise prices,” Smith continued. “They will face a CMA that is skeptical of arguments that mergers boost investment incentives — the CMA rightly believes it is competition that drives better outcomes for consumers, not consolidation.”

As two of the main four U.K. telcos, both Three and Vodafone also make their infrastructure available for mobile virtual network operators (MVNOs) — essentially adding further carrier competition to the mix. However, the CMA noted that it’s concerned that a merger might make it more difficult for MVNOs to negotiate good wholesale deals which in turn will impact pricing for their own customers.

One other potentially contentious issue relates to the fact that Three is owned by Hong Kong-based conglomerate CK Hutchison Holdings, a company that is subject to a national security law introduced by China in 2020 — Unite the Union argues that as the subsidiary of a Hong Kong company, Three could be compelled to share sensitive data with the Chinese state. Such a scenario is precisely why the U.K. introduced the National Security and Investment Act back in 2022, with previous form in blocking deals between U.K. entities and Chinese companies.

However, that isn’t a matter for the CMA to contend with, and the two companies are reportedly cooperating with the government as part of its national security review processes.

Legal wrangles

It’s worth noting that Three has already been involved in another recent failed acquisition effort, after its parent Hutchison tried to buy one of the other four major U.K. carriers O2 in a £10.25 billion deal — however, this was blocked by EU regulators eight years ago. Then 18 months ago, a European court adviser suggested that original court ruling should be dismissed, so it’s not clear how that might impact this latest merger attempt.

Elsewhere, the U.K. has recent form in blocking big-bucks acquisitions, with Adobe and Figma pulling the plug on their $20 billion deal as a result of regulatory pushback both in the U.K. and the wider EU. And Microsoft had to make some notable concessions to get its $68.7 billion Activision acquisition over the line.

Vodafone and Three is a different animal though — it involves core infrastructure, with the two companies estimated to currently control nearly half the available radio spectrum.

“This case has more moving parts than the CMA’s other recent big decisions, and is arguably more important for the U.K. economy,” Smith said. “There will be difficult issues for the merging companies to get past.”