Vodafone and Three merger hopes hit by CMA concerns about it leading to higher prices

Approval for the Vodafone and Three merger is now in doubt as the Competition and Markets Authority (CMA) says it could lead to higher prices for consumers.

Although a final decision is not expected until December 7, the CMA says it is now worried that the merger “could lead to millions of customers having to pay more.”

Vodafone and Three disagree with a number of elements in the Provisional Findings. Read their full response HERE.

 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.”

Vodafone CEO of European markets Ahmed Essam said “Whilst we disagree with the assertion that the merger will lead to price rises for customers, we are encouraged by the recognition from the CMA that the country needs a better quality network that the £11bn investment will bring”.

Potential solutions

The CMA says “will explore potential solutions to its concerns before a final decision by December 7.” However, it has provisionally concluded that the merger would lead to a “substantial lessening of competition in the UK – in both retail and wholesale mobile markets.”

The investigation, led by an independent inquiry group, suggests that the merger would result in price increases for millions of mobile customers or reduced services, such as smaller data packages in their contracts.

Concerns

The CMA has particular concerns that higher bills or reduced services would negatively affect those customers least able to afford mobile services, as well as those who might have to pay more for improvements in network quality that they do not value.

The CMA has also provisionally found that the merger would negatively impact MVNOs, such as Lyca Mobile, Sky Mobile, and Lebara, which rely on the existing network operators to provide their own mobile services.

“The merger would reduce the number of network operators from four to three, making it more difficult for MVNOs to secure competitive terms, restricting their ability to offer the best deals to retail customers.”

Overstated

However, the CMA does concede that the merger could improve the quality of mobile networks and accelerate the deployment of 5G networks and services. But it considers that these claims are overstated and that the merged firm would not necessarily have the incentive to follow through on its proposed investment programme after the merger.

The CMA will now consult on its provisional findings. It will also consult on potential solutions to its competition concerns, including the options set out in its remedies, such as legally binding investment commitments overseen by Ofcom and measures to protect both retail customers and customers in the wholesale market. The CMA will retain the option to prohibit the merger if it concludes that other remedy options will not address its competition concerns effectively.

Guarantees

Stuart McIntosh, chair of the inquiry group leading the investigation, said, “We’ve taken a thorough, considered approach to investigating this merger, weighing up the investment the companies say they will make in enhancing network quality and boosting 5G connectivity against the significant costs to customers and rival virtual networks. We will now consider how Vodafone and Three might address our concerns about the likely impact of the merger on retail and wholesale customers while securing the potential longer-term benefits of the merger, including by guaranteeing future network investments.”

Three CEO Robert Finnegan immediately took to social media to say:

“The Vodafone/Three merger is a once-in-a-generation opportunity to transform the UK’s digital infrastructure with £11bn of investment. Vodafone and Three UK disagree with the CMA’s provisional findings that their merger raises competition concerns and could lead to price rises for customers.

“By all measures, the merger is pro-growth, pro-customer, and pro-competition. It can, and should, be approved by the CMA. The current UK four-player mobile market is dysfunctional and lacks quality competition, with two strong players and two weak players.

“This is reflected in the current state of the UK’s digital infrastructure, which everyone agrees falls well short of what the country needs and deserves. 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.”

Analyst Kester Mann of CCS Insight  agreed that the CMA’s concerns make for uncomfortable reading for Vodafone and Three.

“However, many of these had been outlined previously, notably the potential for higher prices and the likely impact on the wholesale market. The main setback for the merging parties is that the CMA considers claims of superior network quality post-integration to be ‘overstated.’

“The CMA offers a potential path to approval through a range of remedies. Crucially, it appears willing to consider ‘behavioral remedies,’ such as enhanced network access for virtual providers or safeguards for retail customers.

“This is significant, as many had feared that more onerous structural remedies—such as selling assets or supporting a new entrant—would be required. In this sense, Vodafone and Three should be encouraged by the tone of the CMA’s report, which appears more open to the merger than I was expecting.

“The ball is now firmly back in the court of Vodafone and Three. They need to quickly assess these proposals and make further suggestions ahead of a final deadline in early December. The next three months may prove to be the most pivotal in the history of the UK telecoms sector.

“I retain my view that approving the merger would be the best outcome for the future of 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.”

Said analyst Paolo Pescatore“The CMA’s findings on the Vodafone UK / Three UK merger do signal a potential pathway, importantly through behavioural rather than any structural remedies over and above the £11bn 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. Noth 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.”

Matthew Howett, founder & CEO of Assembly Research  
is optmistic the merger will go ahead and that this is just a temorary stumbling block:

“A deal of this size and scale was alway going to face intense scrutiny from the CMA, and it was fanciful that it could have been approved without any sort of remedies. The main impediment to it going through was the imposition of a structural remedy – anything that facilitated a new entrant and therefore re-created the problem the merger was trying to solve. With the CMA essentially having taken that off the table, for the first time we can see a pathway for the deal to complete. 

“Concern over the impact of the merger on prices for consumers was predictable but is remediable. While prices in the UK are already some of the lowest among European peers (including the US and Japan), it’s possible to see a workable commitment to social tariffs, or contracts that give protection to the most sensitive to any rise in prices, even if by a small amount”. n