The Vodafone and Three Merger

Article by Tommaso Johannes Forni

In the summer of 2023, Vodafone UK and Three UK, the third and fourth largest mobile phone operators in the UK at the time, announced plans to merge to create a new, advanced 5G network offering excellent levels of coverage and connection speeds to customers, at no extra cost. Vodafone’s press release at the time stated that the merged business would invest £11 billion in the UK over ten years to create one of Europe’s most advanced standalone 5G networks.

The two companies were also looking to merge in order to compete more effectively with the UK’s two leading mobile operators, namely O2 and EE.

CMA scrutiny

The UK’s Competition and Markets Authority (CMA) entered the scene in early 2024 to determine whether the merger would harm competition in the telecoms sector.

Where the statutory criteria set out in the Enterprise Act 2002 are met, the CMA has the power to review a transaction. There are two parts to a CMA investigation – phase 1 and phase 2. In phase 1, the CMA needs to establish whether there is a realistic prospect that a qualifying merger will cause a ‘substantial lessening of competition’ (SLC) in one or more markets within the UK. If this criterion is satisfied, the CMA moves on to phase 2, where it conducts an in-depth investigation to determine whether it is more likely than not that the merger will lead to an SLC (balance of probabilities test). Throughout both phases, the CMA will also consider whether the transaction gives rise to a relevant merger situation. There are a number of potential outcomes once a phase 2 investigation is completed: i) the merger is cleared, ii) the merger is cleared subject to conditions, or iii) the merger is prohibited.

In March 2024, upon the conclusion of the CMA’s phase 1 inquiry into the Vodafone/Three merger, the CMA decided that the merger could have resulted in an SLC in one or more UK markets. The matter was then referred for a phase 2 investigation.

In September 2024, the CMA published the provisional findings of its phase 2 investigation. At this stage, the CMA found that the merger, which would reduce the number of mobile network operators from four to three, could result in an SLC in two UK markets – the supply of retail mobile telecommunications services to end customers (retail market) and the supply of wholesale mobile telecommunications services (wholesale market). In relation to the retail market, the CMA provisionally concluded that the merger would lead to price increases for tens of millions of consumers or would lead to customers receiving reduced services, like smaller data packages in their contracts. With regards to the wholesale market, the CMA believed that the merger would negatively affect a group of customers known as Mobile Virtual Network Operators (MVNOs), like Sky Mobile and Lyca. The CMA remarked that these MVNOs would find it more difficult to secure competitive terms and would, therefore, struggle to offer attractive deals to customers.

Despite these findings, the CMA also noted that the merger had the potential to improve the quality of mobile networks and unleash the deployment of next-generation 5G networks and services. However, it believed that the disadvantages of the merger outweighed the advantages at that point.

A consultation period followed, in which the CMA invited any interested parties to make representations on these provisional findings. The CMA also consulted on potential solutions that could mitigate its competition concerns.

On 5th December 2024, the CMA published its final decision on this merger. The CMA’s final decision was to approve the merger, subject to certain legally binding conditions. These conditions would require the merged business to:

1. Deliver on the proposed network investment programme, which involves investing £11 billion to develop a 5G standalone network over the next eight years.
2. Cap selected mobile tariffs and data plans for at least three years to protect customers from short-term price increases.
3. Offer pre-set prices and contract terms for wholesale services to ensure that MVNOs receive competitive terms and conditions.

Change in approach from the CMA?

This decision marks a significant change in the approach of the CMA. In the past, the CMA preferred to impose structural remedies (e.g. selling part of a business) on parties when it identified notable competition concerns in a deal or, in the absence of feasible structural remedies, would choose to prohibit a transaction altogether.

In 2016, for example, O2 and Three were proposing to merge their UK businesses. The CMA referred the matter to the European Commission, which had jurisdiction to review the transaction at the time. The CMA Chief Executive at the time, Alex Chisholm, then wrote a strongly-worded letter to the EU’s competition commissioner expressing his objection to the deal. In the letter, Chisholm wrote that the only possible remedy he saw for the deal to proceed would be divesting one of the parties’ mobile networks or possibly allowing for ‘limited carve-outs’ from the divested business. In the absence of such structural remedies, Chisholm urged the Commission to prohibit the transaction.

In this case, however, the CMA accepted behavioural remedies (which relate to the future behaviour of the merged entity) as a way to approve a merger that it initially felt raised substantial competition concerns.

One possible driver behind this shift in the CMA’s approach from structural to behavioural remedies is the UK government’s focus on boosting economic growth. In October 2024, the government published its Industrial Strategy Green Paper, where it identified competition policy as an important lever to stimulate growth and stated that it would soon consult on a ‘Strategic Steer’ to set out its priorities for the CMA.

Soon thereafter, the CMA published its formal response to the Green Paper, stating that the regulator would support the government’s industrial strategy by advising the government on how it can harness the power of competitive rivalry and use its powers to directly promote growth.

Therefore, the Vodafone/Three decision can be seen as an example of the CMA prioritising long-term growth. This is because, although the CMA found that the merger could have anticompetitive effects in the retail and wholesale telecommunications markets and cause price rises, the body also recognised that the merger could lead to significant increases in mobile network quality in the UK and unleash the deployment of cutting-edge 5G services. The CMA also noted that the merger could boost competition in the long term, as the other main mobile operators, O2 and EE, would need to upgrade their own systems to compete with the merged entity. By approving the merger subject to the conditions mentioned above, the CMA prioritised long-term growth and competition while also minimising the risk of short-term anticompetitive conduct.

Sources

https://www.herbertsmithfreehills.com/notes/crt/2024-posts/Vodafone-Three-JV-cleared-in-UK-with-behavioural-remedies–key-takeaways-and-implications-for-future-deals

https://www.gov.uk/guidance/mergers-how-to-notify-the-cma-of-a-merger#cmas-merger-inquiries-process

https://assets.publishing.service.gov.uk/media/66ed7dd48c74229125e745a0/Summary_of_provisional_findings.pdf

https://competitionlawblog.kluwercompetitionlaw.com/2020/02/21/merger-remedies-is-it-time-to-go-more-behavioural/