Vodafone’s £15 Billion Deal Opens Door to European Consolidation

(Bloomberg) — Vodafone Group Plc won approval for a deal to create the UK’s biggest mobile phone company in a major milestone for European telecommunications operators, opening the door for a potential wave of consolidation that would allow the industry to rebuild.

Vodafone bosses had complained to regulators for years that their overly restrictive stance was hurting the industry across Europe. They argued they couldn’t build the scale to keep investing in networks as consumers voraciously devour capacity for streaming and other services.

Regulators have long worried that reducing competition would lead to higher prices, meaning that Thursday’s decision by the UK’s antitrust watchdog to approve a £15 billion ($19.1 billion) merger with CK Hutchison Holding Ltd.’s Three isn’t without risk. 

If competition is reduced and mobile bills rise, there’ll be a backlash from consumers who’ve enjoyed the benefits of price wars as providers fight for customers with phone deals, faster speeds and unlimited data.

Vodafone’s Chief Executive Officer Margherita Della Valle says that networks are expensive, and out-of-date restrictions have limited companies’ financial firepower to upgrade them.

“This logic that every country, every region, every rural area in Europe needs to be covered by at least four competing, fully fledged infrastructures, has been a massive issue,” she said in an interview. “It’s created effectively subscale operators that don’t have the capacity to invest.”

On Thursday, the UK’s Competition and Markets Authority cleared the £15 billion ($19 billion) Vodafone-Three deal, after a 10-month-long inquiry, subject to the companies committing to invest £11 billion in the UK’s digital infrastructure. 

Analysts at JPMorgan said that the UK ruling, as well as another decision in Italy, “may gradually catalyse more deals” in Europe.

Optimism around a regulatory shift has helped the industry’s stocks outperform the broader market in 2024. The Stoxx 600 Telecommunications index has gained 20% and Vodafone is heading for its first full-year advance in seven years. 

But for all the lobbying, skeptics don’t buy operators’ complaints. Allowing companies to get bigger within EU countries will just lead to higher prices and certainly won’t help them reclaim their former glory as tech giants, according to Tommaso Valletti, former chief competition economist at the European Commission.

“Vodafone was the number one company in the world,” said Valletti, who blames its troubles, and those of the wider sector, on poor business decisions. “Why should managerial inefficiencies be compensated by higher prices for 65 million users?”

Past Glory

Europe’s telecom operators were the best in the business 20 years ago — big, innovative and flush with cash. But they’re now the world’s laggards. Many countries are far behind counterparts in Asia and the US rolling out 5G, and asset sales and streamlining have replaced once-massive expansion plans.

In Vodafone’s case, its market value is a fraction of its peak during the tech bubble, and the price-earnings ratio is at a 36% discount to the sector.

Della Valle, who became CEO in 2023, has been tasked with reviving the company. She’s exited two major European markets and is now relying on the Three merger to turn Vodafone into the largest operator in the UK by revenue.

There have been concerns among some people within the company that further share-price declines could make it a takeover target, according to people familiar with the matter. Investment bankers, acting independently of the company, have been sounding out potential buyers to gauge interest in parts of the business, they said.

“We were clear on the three markets where we needed to take action – Italy, Spain and the UK – to reshape Europe for growth,” Vodafone said in response to the possibility of selling off other European assets.

Blocked Mergers

A change in regulation would mark a sea change for the sector in Europe, which has been curtailed by restrictions on so-called 4-to-3 mergers. Antitrust agencies have repeatedly either blocked mergers that reduce the number of operators within a country to three, or forced the creation of a fourth player.

In 2015, Telenor ASA and Telia Co AB scrapped a planned merger of their operations in Denmark because of EU opposition. The following year, CK Hutchison’s acquisition of Telefonica SA’s UK business O2 was blocked to protect low prices. 

Earlier this year, the Vodafone-Three merger seemed to be heading in this direction. The CMA spoke harshly of the deal in March, saying it would reduce competition. Executives at Vodafone planned to walk away if forced to create another player, according to people familiar with the matter. 

But in the fall, authorities changed their tune, accepting the need for more investment in the mobile network. 

Meanwhile, the European Commission acknowledged this year that the telecom industry has a problem, and a report from former Italian ECB President Mario Draghi said consolidation is the way forward. 

Draghi highlighted that poor financial returns mean lower investment and reduced innovation. Still, convincing EU capitals to back consolidation remains a major hurdle when many fear higher prices and are satisfied with their mobile coverage. 

Poor Decisions

Europe’s telcos can’t blame all their woes on regulation, given the litany of bad business decisions in their past. Vodafone expanded too far, stretching itself across multiple continents, and has since had to pull back. It also turned down the option to be the exclusive seller of iPhones in the UK in 2007.

Other companies have also streamlined. Telenor exited Pakistan, Deutsche Telekom AG and Orange SA sold operations in the UK, and Spain’s Telefonica has been trying to pull back from Latin America.

Private equity firms have been buying European operators’ tower businesses, which many firms are selling to pay off debt and strengthen balance sheets.

Meanwhile, the industry continues to push its case.

“There is a window of opportunity, but we need to seize it,” said Alessandro Gropelli, director-general of telecom lobby group Connect Europe. “If we keep the players in this field starved of returns on capital you are not putting them in the position to win the game.”

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