A provisional judgement in a protracted bid to unite two of the UK’s prominent telecommunications companies has been issued by the country’s competition watchdog.

According to the Competition and Markets Authority (CMA), the proposed $19 billion merger between Three and Vodafone, disclosed over a year ago, could potentially escalate prices for consumers, deteriorate the quality of services like smaller data packages, and curtail investment in the UK’s mobile networks.

The CMA also critiqued the mobile virtual network operators (MVNOs) market — a system designed to foster competition by allowing new carriers to offer services without investing heavily in their own communications infrastructure. Both Three and Vodafone provide network services to MVNOs, including iD Mobile and Lebara. The CMA expressed concern that the merger could make it harder for MVNOs to secure reasonable wholesale deals, ultimately leading to costlier services for customers.

Beyond competition, another possible stumbling block to this merger had emerged. Three is owned by CK Hutchison Holdings, a Hong Kong-based conglomerate subject to a national security law introduced by China in 2020, leading to fears that Three might be forced to share sensitive data with the Chinese government. The UK had previously enacted the National Security and Investment Act to address such situations, having previously used this law to obstruct other deals between UK companies and Chinese firms.

However, the UK government gave the Three / Vodafone merger the go-ahead in May, subject to certain conditions, with the remaining regulatory concerns left to the CMA.

Examination

Given the implications of reducing the UK’s mobile network operator count from four to three (with the other two being O2 and EE), a transaction of this scale was inevitably going to invite regulatory scrutiny. Both companies had seen this coming and announced their intention to finalize the deal by the end of 2024.

The CMA initiated its preliminary investigation in late January, moving to a comprehensive examination in June after conducting a detailed market analysis and collecting industry feedback.

The conclusions of these findings suggest that competition helps to keep prices low. Therefore, reducing the number of main players from four to three could push prices upwards, with a combined Three / Vodafone entity becoming the UK’s largest carrier, holding nearly one-third of the market share. The CMA found that separate companies are more likely to invest in network coverage to distinguish their services from the competition — in other words, less competition might lead to reduced infrastructure investment.

Tom Smith, a former CMA legal director and current competition lawyer at London law firm Geradin Partners, noted that the companies’ argument for increased scale to fuel investment was not sufficiently proven to counterbalance the potentially harmful effects of the merger.

Solutions

The CMA’s decision is provisional, and the regulator has now initiated a formal period for the parties to address its concerns. This includes structural remedies such as selling off parts of their businesses. The CMA, however, considers this an unlikely option, as there are no obvious spin-offs that can operate as standalone businesses. The regulator did suggest another possible solution, involving a “partial divestiture” of specific mobile network assets and spectrum to enhance an existing MVNO’s competitive capability or enable a new provider to enter the market.

Three and Vodafone, in a joint statement, disagreed that the merger would lead to increased prices in either the consumer or wholesale markets. They expressed their willingness to work constructively with the CMA on the proposed remedies and have offered to have their previously promised £11 billion network investment independently monitored and enforced by Ofcom.

“The current UK 4 player mobile market is dysfunctional and lacks quality competition with 2 strong players and 2 weak players,” said Robert Finnegan, CEO of Three. “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 UK customers, businesses and wider society.”