This meant that a more detailed (Phase 2) merger inquiry was required.

Provisional findings

On September 13th 2024, the CMA published provisional findings on the Phase 2 investigation.

The independent inquiry group has provisionally concluded that:

• the merger would lead to price increases for tens of millions of mobile customers, or see customers get a reduced service such as smaller data packages in their contracts
• there are concerns that higher bills or reduced services would significantly impact those customers least able to afford mobile services
• there are also significant concerns about the impact of the merger on the large number of consumers who might have to pay more for improvements in network quality that they don’t value
• the deal could negatively impact ‘wholesale’ telecoms customers such as Sky Mobile and Lebara which rely on the existing 4 network operators to provide their own mobile services
• the deal would affect these wholesale customers by reducing available network operators to just 3, likely meaning they are less able to secure competitive terms and offer the best deals to retail customers

At the same time, the merger could improve the quality of mobile services and bring forward the deployment of next generation 5G networks and services. However, the CMA considers that:

• the merger firm would not necessarily have the incentive to follow through on its proposed investment programme after the merger
• the CMA also has doubts as to whether those  improvements, if delivered, would be as significant as claimed

As a result, the CMA has provisionally concluded that the deal is likely to lead to a substantial lessening of competition in the UK.

What happens next?

These are provisional findings. The CMA will now publicly consult on its findings and explore potential solutions to its concerns before reaching a final decision by mid-December. The CMA has set out potential solutions to Vodafone and Three in a remedies notice.

These range from legally binding ‘investment commitments’ overseen by the sector regulator and measures to protect both retail customers and customers in the wholesale market, to prohibiting the merger.

In response, Vodafone and Three UK say they disagree with the CMA’s Provisional Findings that their merger raises competition concerns and could lead to price rises for customers.

The pair describe the proposed merger as a once-in-a-generation opportunity to transform UK digital infrastructure with £11 billion (€13.3bn) of investment and that by all measures, the merger is pro-growth, pro-customer and pro-competition. “It can, and should, be approved by the CMA,” they assert. “This is not a final decision, and we look forward to working with the CMA to secure approval,” they say, contending that the combination of Vodafone and Three will fix the country’s dysfunctional mobile market characteristics, unleashing more competition and investment.

“The merger of Vodafone and Three will transform this current reality, bringing best-in-class 5G to every community, school and hospital in the country,” they say. “The CMA also recognises that the merger would improve network quality. We will continue to work with them to demonstrate the merged company will deliver in full on the committed network investment,” they confirm.

Margherita Della Valle, Vodafone’s Chief Executive, said: “Our merger is a catalyst for change. It’s time to take off the handbrake on the country’s connectivity and build the world-class infrastructure the country deserves. We are offering a self-funded plan to propel economic growth and address the UK’s digital divide.”

“Great network connectivity is a critical enabler of so many elements of our daily life and is central to the future prospects of so many sectors. Businesses large and small are dependent on it and it enables new industries – like AI – to thrive. It facilitates a step change in productivity and care across the public sector, and it lies at the heart of every nation’s future prosperity.”

They say that transforming the UK’s telecoms infrastructure is vitally important for businesses, the public sector, the UK’s technological advancement, and the government’s stated mission to kickstart economic growth.

50 million customers directly benefit from improved network quality

The merger will extend the network quality benefits well beyond the merged company’s own customer base to VMO2’s customers – delivering better quality, enhanced capacity and greater coverage to over 50 million mobile customers across the country. “We are encouraged by the fact that the Provisional Findings acknowledge that our agreement with VMO22 “will provide a notable and rapid increase in network quality for its wholesale and retail customers,” they add.

Pricing

“We do not agree with the CMA’s provisional finding that prices will increase,” they state. “From the outset, we have been very clear that the merger will not affect our pricing strategy and that all social tariffs will continue to protect the vulnerable.”

“Importantly, the investment case underpinning the merger is not based on hypothetical price increases and the CMA’s price rise assumptions are contrary to the business and investment plans the Parties have signed up to for the merged company.”

“Prices will either stay broadly the same or actually drop post-merger as a result of the vastly enhanced competitive pressures between Mobile Network Operators and MVNOs, who will also benefit from the merger,” they argue.

MVNOs

“We disagree that this merger will adversely affect the wholesale market,” they declare. “Today, 90 per cent of the UK’s MVNOs rely on either VMO2 or BTEE as their wholesale provider. A combined, stronger network would significantly boost competition in the wholesale market by giving MVNOs more choice and better quality from three scaled wholesale network providers.”

Working with the CMA on the way forward

“We are reviewing the Notice of Possible Remedies and look forward to working constructively with the CMA on the different options proposed. We are confident we can address their concerns,” they confirm.

“We have made clear we are committed to delivering our £11 billion investment plan and best-in-class network which locks in the transaction’s benefits and addresses the CMA’s provisional concerns. We are willing for this commitment to be monitored independently and enforced by Ofcom,” they conclude.

A Virgin Media O2 spokesperson said: “We believe that our new long-term agreement with Vodafone addresses many of the issues outlined by the CMA and that there’s a clear rationale for this consolidation.”

“As well as bolstering elements of our existing partnership, the new agreement means that, post-merger, spectrum holdings will be more balanced which improves the functioning of the network sharing arrangement. This ultimately ensures investment is maximised and network competition, coverage and performance is sustained and enhanced to the benefit of consumers and businesses across the country. We will continue our conversations with the CMA following its provisional findings.”

According to Paolo Pescatore, TMT Analyst at PP Foresight, the CMA’s findings on the Vodafone UK / Three UK merger signal a potential pathway, importantly through behavioural rather than any structural remedies over and above the £11 billion network investment commitment to be enforced by the regulator.

“As expected, the CMA focuses primarily on pricing implications for consumers, but focusing only on price ignores the fact that the merger will bring much needed investment across the UK. Even if the price increase is to be believed, which the companies dispute, it’s pence per month and doesn’t in anyway outweigh the benefits of building the network the country deserves,” he asserts.

“To date, both parties are demonstrating that this is genuinely in the interest of UK plc, the economy, and users which paves the way for a far stronger three player market than the current imbalance, ” he concludes.

According to Kester Mann, Director, Consumer and Connectivity at  CCS Insight, Vodafone and Three would have breathed a huge sigh of relief this morning as the long-awaited findings of the UK Competition and Markets Authority (CMA) into the proposed merger appeared to offer a path to approval.

“At first glance, the watchdog’s statement makes for uncomfortable reading, raising once again clear concerns about the threat of higher prices and the impact of reduced choice in the wholesale market,” he suggests. “In its biggest setback, it said that claims of superior network quality post-integration are ‘overstated’ — this would have hurt given the £11 billion network investment programme initially outlined.”

“But Vodafone and Three always knew that winning over the watchdog was going to be a monumental task and one likely to necessitate further commitments, he admits. “In July, the merging parties took an important step forward by agreeing to sell spectrum to Virgin Media O2 and extend the Beacon network sharing agreement. This seems to have allayed some competition concerns in these areas, although the amount of spectrum and which frequencies hasn’t been revealed,” he notes.

“In my view, the most crucial part of the CMA’s statement is its apparent willingness to consider ‘behavioural remedies’ such as better terms for virtual providers, more support for disadvantaged customers, and the option for customers to ‘roll over’ their existing contract terms for a predefined period,” he advises. “This is significant as I had feared that more onerous ‘structural remedies’ — such as selling major assets or supporting a new entrant — could be required to get the deal over the line. This happened earlier in the year in Spain, where a joint venture between Orange and MasMovil was only approved after the European Commission mandated the sale of spectrum to Digi to help it deploy a new mobile network,” he observes.

“Such a stance in the UK would probably have extinguished the deal. Vodafone and Three would have almost certainly pushed back on accepting proposals that would only serve to undermine the rationale of them coming together in the first place. In this sense, a major potential barrier has been removed,” he suggests.

“Concern about price rises was always going to be front and centre of the CMA’s investigation. But I’ve never really seen this as a major reason to block the deal. Even by moving from four networks to three, the UK will remain highly competitive, supported by a large and fast-growing market of virtual providers. CCS Insight’s latest UK forecast shows that under the scenario of the merger being approved, average monthly customer spending would only be a few pence higher than if it’s blocked,” he says.

“Admittedly, recent plans outlined to raise tariffs by up to £1.80 per month don’t sound great, particularly for people on low incomes and during the current period of economic uncertainty. An opportunity to address this would be to make commitments on existing social tariffs or offer new ones. But let’s also remember that UK consumers still enjoy some of the best-value mobile plans in Europe.”

“The debate on pricing extends to the wholesale market and here I see both sides of the argument. Eliminating a network would mean fewer potential partners for virtual providers, potentially stifling their growth. But it would also create a stronger network alternative with a greater incentive to fill increased capacity,” he argues.

“Either way, both pricing and wholesale are areas that should be relatively straightforward to propose behavioural remedies acceptable to the CMA.”

“So, the ball is now firmly back in the court of Vodafone and Three, which must act quickly and decisively to assess today’s report and make suggestions ahead of a final deadline in early December.”

“It appears to have made a good start. In its response to the CMA, Vodafone made a commitment that its network investment plan can be independently monitored and enforced by Ofcom.”

“I retain my view that approving the merger would be the best outcome for the UK mobile industry. A combined Vodafone and Three can make more-efficient investments and push BT and Virgin Media O2 to raise their game too, boosting the market’s long-term connectivity credentials. This will be crucial not just to millions of households and businesses but also in supporting wider economic recovery.”

“The next three months may prove to be the most pivotal in the history of the UK telecom sector. Vodafone and Three have much work still to do, but the finishing line may now finally be in sight,” he concludes.