Another major piece of mobile M&A seems to be in the works in the UK. Vodafone today confirmed that it was in merger talks with Three UK, a carrier owned by CK Hutchison, to accelerate their 5G rollout. A deal would not involve a cash consideration, Vodafone said:

“In the envisaged transaction, both companies would combine their UK businesses, with Vodafone owning 51% and our partner CK Hutchison 49% of the combined business,” it wrote in its statement. official statement on the market published earlier today. The statement itself was made in response to press speculation surrounding a potential deal, Vodafone noted. It described the combination as a “no cash” deal — that is, no real price tag, or deal valuation, or other financial compensation paid as in an acquisition.

Vodafone is publicly traded in the UK and its market cap is currently around £28.7 billion, or $32.2 billion at current rates. CK Hutchison has a market cap of approximately $21 billion (but that also regulates other assets).

The story of mobile operators in the UK is one of soap opera-like proportions. Three has made a major merger attempt in the past, a £10.25 billion deal for rival airline O2. However, that deal was blocked by regulators in 2016; only for regulators, four years later in 2020, to reverse that decision.

O2 had switched to a different combination at the time: it had merged with Virgin Media/Virgin Mobile (which itself had been acquired and merged by Liberty Media with its older pay-TV assets) in a $39 billion deal. Meanwhile, EE – itself a merger of T-Mobile and France Telecom’s acquired and then split back into Orange – was snapped up by BT (which used to own O2, then spun it out and then also reported designs to buy it back) in a deal of $19 billion. (Three has also made some smaller deals in the meantime, like this one for $373 million for UK Broadband to get more mobile spectrum.)

Vodafone was always an arm’s length away from all that junk.

No doubt part of the reason it was the market leader in Europe in general, and the UK in particular. However, these various mergers and acquisitions did mean that the other carriers gained more scale and therefore put more pressure on the market leader.

Now Vodafone needs Three’s scale to compete, and Three needs Vodafone. Or at least, that’s probably what they’ll argue when they go into a formal process and the deal comes up for regulatory approval. That overturned merger ruling in Three’s past didn’t lead Three to partner with O2, but in the end it could still be helpful, laying the groundwork for approving any next major mergers Three attempts, like this one. now with Vodafone.

The big advantage of all of the above is that mobile carriers are always striving for greater scale – critical to the economics of carriers’ capital-intensive, infrastructure-intensive business model, but all the more important today because of the data and customer property that this scale carries. and because there are fewer routes for carriers monetizing users, given the amount of content and services that are disconnected from customers’ carrier relationships.

The issue of scale is also central to this latest deal.

Vodafone plays its merger card terribly here carefully. It notes that the deal would be made to accelerate the rollout of 5G over a larger single network, specifically that it would make such a rollout more financially viable – using a government statement from the two carriers to back up its claim. to support.

“The UK government rightly sees 5G as transformative for the economy and society and crucial for the UK to become more competitive in an increasingly digital world,” it notes, but “as Ofcom has identified that some operators in the UK – Vodafone UK and Three UK – lack the necessary scale to earn their cost of capital. Combining our businesses will provide Vodafone UK and Three UK with the necessary scale to accelerate the roll-out of full 5G in the UK and extend broadband connectivity to rural communities and small businesses.”

This is only step one in the process, which may or may not end in a deal; Vodafone said it and Three would be making more statements as talks progress, so keep an eye on this space.