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Telecommunication

Vodafone in talks to combine U.K. arm with CK Hutchison's Three: FT

Latest effort to consolidate mobile telecoms comes as investor exerts pressure

A combination of Vodafone UK and Three UK would bring together the third and fourth largest mobile network operators in Britain.   © Reuters

LONDON (Financial Times) -- Telecommunications group Vodafone is in talks to combine its U.K. operations with domestic rival Three UK, the mobile operator owned by Hong Kong infrastructure conglomerate CK Hutchison, people with direct knowledge of the matter said.

The deal, if it materialized, would herald the latest attempt to consolidate the British mobile market as Vodafone faces pressure from Europe's largest activist investor, Cevian Capital, to simplify its business, pursue deals in national markets and improve returns.

A combination of Vodafone UK and Three UK would bring together the third- and fourth-largest mobile network operators in Britain, though any deal to reduce the number of leading brands from four to three would trigger scrutiny from competition authorities.

Industry executives are hopeful that regulators' increased awareness of the need to invest in network infrastructure has made them more amenable to mergers than they were in 2016, when the European Commission blocked a proposed merger between O2 and Three.

European telecom groups have struggled over the past decade, with strong competition and consumer-friendly regulations weighing on earnings. Although Vodafone's share price has rallied by 3% since the start of the year, the company has shed 44% of its value over the past five years.

Three, meanwhile, has struggled to gain scale over the past few years, despite ambitions to double its size. Though the company has enjoyed an increase in net new customers since mid-2020, it has not managed to translate those gains into significant revenue growth. Last week, the company reported flat quarter-on-quarter revenues of 582 million pounds ($710 million).

Over the past year, Vodafone chief executive Nick Read has been vocal about his desire to pursue deals in countries he believes suffer from an excess of market competition, including Spain, Italy and the U.K.

The exact structure being discussed between Vodafone and CK Hutchison could not be learned, though Read has said on many occasions that he is focused on pursuing combinations more than outright purchases, given his ambitions to reduce the group's debt.

Earlier this year, analysts at Enders Analysis noted that Vodafone's "lack of funding capacity" suggested that in the U.K. it could look to "form a joint venture with the potential to contribute additional debt or receive cash equalisation payments to assist with leverage reduction."

Analysts had previously speculated that Vodafone could seek to buy Three but noted that it would need to meet CK Hutchison's hefty price expectations for the privilege of consolidating the market.

Discussions between the two companies also took place last year, the Financial Times has previously reported, though they did not lead to a deal.

CK Hutchison did not respond to a request for comment. Vodafone declined to comment.

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