Could Vodafone and Three be next UK mega-merger?

It has been little over a year since mobile operator O2 tied-up with cable broadband provider Virgin Media to create a new telecom giant ‘Virgin Media O2’. Unlike Three’s proposed takeover of O2, which was blocked by the regulators back in 2016 due to competition concerns, this merger was approved as it involved two service providers with complementary businesses creating a new entity to accelerate investments in 5G and fibre networks.

Recently, it has being reported that Vodafone and Three are in talks about a potential merger. The main rationale for coming together in this case seems to be to drive scale and reduce costs in the mobile sector, as opposed to convergence in the case of the O2 and Virgin Media merger.

UK telecom landscape

UK telecom landscape_Counterpoint Research


How likely is the Vodafone and Three merger to be approved?

Operators’ perspective: The UK is a competitive market, with operators providing unlimited data plans as well as a wide array of MVNOs offering discounted services. Vodafone, the current third largest operator, has been under pressure from its investors to improve returns, whereas Three, the UK’s number four operator, has reported flat revenue growth for last few quarters and has been vocal on the need for structural changes to the UK telecoms market. Therefore, the main reason behind the Vodafone and Three merger is to increase subscriber share (the merger would create a market leading entity) and lower operating costs.

Another rationale could be RAN sharing and cost reduction, as the two operators have a similar set of frequencies in the sub-6 GHz range. The two operators combined can create a more sustainable and stronger player with increased ability to network investments and benefit from economies of scale.

5G Spectrum Portfolio of Vodafone and Three UK

5G Spectrum Portfolio_Counterpoint Research

Regulator’s perspective: The primary concern around this deal would be the reduction of the number of players from four to three. Some studies show that such reduced competition can lead to increased prices and negatively impact service levels. In addition, regulators are wary of mergers creating a dominant player in the market. As a result, this merger may collapse for similar reasons as Three’s takeover bid of O2.

However, while the Vodafone and Three merger would create a market leading entity, the resultant approximate 30% subscriber market share would be similar to its competitors. In addition, regulators are suspected to be a little more sympathetic towards mergers these days than in the pre-pandemic times.

Vodafone and Three UK merger_Counterpoint Research


What has changed post-pandemic?

Connectivity services played a very important role throughout the pandemic, emerging as a lifeline for consumers. Many businesses and some aspects of life are now fully dependent on telecom services. Therefore, if a merger promises increased network investments to improve connectivity and quality of service, regulatory authorities are expected to be more flexible and take a softer stance than in the past.

M&A activity in other competitive markets of Europe

  • Spain: Orange (the second largest operator) and Masmovil (the fourth largest operator) recently signed an agreement worth €18.6 billion ($19 billion) to combine their operations and form a 50-50 joint venture. The new entity will become the country’s largest operator with more than 40% subscriber market share.
  • Italy: At the beginning of 2022, Vodafone and Iliad were in talks to merge their units amid cut-throat competition in the Italian market. However, Vodafone rejected Iliad’s preliminary offer of €11.25 billion ($12.92 billion) citing a lack of value-add for its shareholders. The operator is still ready to evaluate other opportunities.

Additionally, Telecom Italia (TIM) hopes to get the right valuation for its fixed-line assets, which the operator plans to sell and raise cash to cut its debt.

These developments indicate there is increasing consolidation occurring in both the mobile and fixed telecom space. Additionally, many operators have spun-off their tower business or launched joint ventures in order to raise money for network investments or reduce debts. For instance, Deutsche Telekom (DT) has recently announced the sale of 51% of its tower business, GD Towers, to a consortium for €17.5 billion ($17.5 billion). The transaction will help the operator with much needed cash to cut debt and proceed with its target of acquiring a majority stake of 50.1% in T-Mobile US (an increase from its current stake of 48.4%).


The UK’s telecom market is characterised by fierce competition, and it is difficult for the operators to grow organically. Key factors that influence operators’ ROI include weakened bargaining power in the procurement of 5G network equipment (in view of the ban on Chinese vendors Huawei and ZTE), competition from other ecosystem players in the enterprise segment (particularly private networks) and increasing cost pressures. Mergers in such an environment help achieve economies of scale through an increased number of subscribers, pooling of resources and lower operating costs. It is likely that the Vodafone – Three merger will be approved and thus improve the overall quality of infrastructure, but only after close scrutiny from regulatory bodies.

Interestingly, Virgin Media O2, Vodafone and Sky are also rumoured to be interested in acquiring broadband service provider TalkTalk. Going by the recent trends it looks to be only a matter of time before we see the next mega-merger in the UK market. There is a high likelihood of the market evolving to a smaller number of integrated telecom operators offering fixed-mobile convergence services and diversifying the way they engage with consumers. One can see such positive impacts from the Virgin Media O2 case, as the new operator recently reported on its first anniversary that there is a growing adoption of converged services, with 45% of its broadband customers also taking a mobile contract.



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UK Operators Face Tight Deadlines to Roll Out Shared Rural Network

UK Operators Face Tight Deadlines to Roll Out Shared Rural Network

Ensuring all citizens have access to mobile and fixed networks is a priority for many governments around the world. However, providing connectivity in sparsely populated rural regions of any country is usually commercially challenging. As a result, several governments – including the UK – are looking at Shared Rural Networks (SRN) as a solution to improve coverage in their countries.

Overview of UK SRN

The UK’s SRN project is a joint operator and government initiative designed to improve mobile coverage in the rural areas of the four nations of the UK: England, Northern Ireland, Scotland and Wales. The overall objective of the project is to increase total 4G coverage of the UK landmass to 95% by 2026. The SRN project is essentially divided into two parts as follows:

  • Phase 1: 4G Partial Not Spots (PNS) – defined as areas where at least one operator provides 4G coverage, but not all four of them.
  • Phase 2: 4G Total Not Spots (TNS) – defined as areas that currently do not receive 4G services from any operator.

The UK’s four operators – EE, O2, Three and Vodafone – are sharing the costs of rolling out the new infrastructure on an approximately 50:50 basis with the government, with the operators contributing to Phase 1 and the government financing Phase 2. Total cost of the project amounts to approximately $1.4 billion (£1.032 billion).

SRN Coverage Obligations

Although individual coverage targets vary from nation to nation, as shown in Exhibit 1, the goal is to raise 4G coverage from all four operators to 84% by the end of 2024 and ensure that 95% of the UK’s landmass is covered by at least one operator by the end of 2026. This should ensure 4G coverage to an additional 280,000 premises, 16,000 km of roads as well as improve indoor coverage in around 1.2 businesses and homes.

Three of the operators – O2, Three and Vodafone – have agreed to build a total of 222 new towers for Phase 1, of which 124 will be in Scotland, 54 in England, 33 in Wales and 11 in Northern Ireland, with each operator leading on 74 of the new sites. Although sharing towers and sites, each operator will procure and operate their own active equipment, i.e. antennas, radios, basebands, etc. However, the exact number and location of masts will depend on the ability to find suitable sites, obtaining power supply, backhaul services and securing the necessary planning permissions.

                         ©Counterpoint Research; Source: Digital Mobile Spectrum Ltd.

Exhibit 1:  SRN Coverage Obligations

EE is contributing to Phase 1 by expanding its existing 4G coverage – primarily through upgrades –  to more than 2,000 sites by 2024. Since March 2020, a total 853 sites have been upgraded, including 449 in England, 254 in Scotland, 97 in Wales and 42 in Northern Ireland. A further 1,500 upgrades are expected by 2024.

Emergency Services Network

Separately, the UK government is financing the construction of a new emergency services network (ESN) across the UK. Built and operated by EE, with equipment provided by  Motorola Solutions, the ESN will also consist of 292 Extended Area Service (EAS) sites financed by the UK government to ensure coverage in some of the most remote parts of the UK. These EAS towers will be available for other mobile operators to offer commercial services as part of their SRN network committment. Achieving the coverage data shown in Exhibit 1 will depend upon the availability of these EAS sites.

Project Status and Schedule

Operators in Phase 1 are in the process of securing sites, reaching rental and access agreements with site owners and obtaining the necessary permissions from planning authorities. Although a small number of PNS sites have already been deployed, the main build out is expected to start sometime in 2H 2022.  Clearly, progress will depend on cooperation with the various rural communities.  Counterpoint Research understands that two of the operators are expected to announce their preferred hardware vendors within the next month or so.

In the case of Phase 2, contracts to design and build the towers, install base station hardware and manage the TNS sites have been awarded with the winning bidders being: Clarke Telecom, Killarney Telecommunications, Mitie Technical Facilities Management and WHP Telecoms.  In addition, a tender notice to supply the backhaul transmission network for the TNS sites was issued in May 2022.


The UK’s operators have chosen not to adopt a neutral hosting approach, which involves the sharing of base station equipment. There is also no pooling of spectrum, resulting in less efficient spectrum utilization. In fact, sharing is largely limited to towers and sites. Counterpoint Research suspects that this was the only way to ensure operator agreement and committment to the project. In addition, the network is a mobile-only network and does not provide any provision for fixed broadband access. Other countries such as Finland and New Zealand have adopted combined mobile and broadband network designs, also with active equipment sharing and spectrum pooling.

Although the UK’s SRN project will undoubtedly improve 4G coverage across large swathes of the UK, it will not deliver coverage to all communities. In particular, aggregate 4G coverage in Scotland will only increase to 74% with limited, i.e. one operator, or no coverage at all across almost a quarter of its remaining landmass. In addition, the operators are up against some tight deployment deadlines, with Phase 1 scheduled to be completed by the end of 2024 – less than two and a half years away.

Finally, rural networks – whether shared or otherwise – should be a golden opportunity for open RAN to deliver on its many promises. Although the UK government is championing its use in the UK, there is, however, no obligation on operators to adopt the technology in this project. As a result, Counterpoint Research expects that all four operators will choose tried and tested, proprietary 4G infrastructure from established vendors Ericsson and Nokia – with perhaps an outside chance that Vodafone will plump for open RAN compliant tech from existing supplier Samsung Networks at some of its sites.


Related Blogs And Reports

Open RAN: Again a Hot Topic at MWC

Chip Vendors Showcase Open RAN Merchant Silicon Solutions at MWC

Open RAN Cheerleader Vodafone Plays Safe with Incumbent Vendors

Open RAN Radios – Chinese Vendors Set To Dominate An Emerging Market?





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