The CMA has cleared, with undertakings, the proposed merger between Vodafone and Three. The CMA conducted an in-depth Phase 2 review of the merger and, unusually, accepted behavioural undertakings from the merging parties. In this article we explore the CMA’s decision and its potential implications for UK merger control. 

Background 

Vodafone Group Plc (Vodafone) is a British multinational telecoms company, which offers a wide range of services, including mobile and fixed-line telephony, broadband, and digital television. Hutchison 3G UK Limited, known as Three, is the UK subsidiary of Hong Kong-based CK Hutchison Holdings (CK Hutchison), and offers mobile telecoms and internet services in the UK.

The transaction is structured as a joint venture between Vodafone and CK Hutchison which will combine their UK telecoms businesses. The parties argued that it will enhance network coverage, improve service quality, and accelerate the rollout of 5G technology in the UK.

The CMA’s review

The transaction will result in the number of mobile network operators (MNOs) in the UK reducing from four to three (there will remain various other virtual operators (MVNOs), which set their own prices but rely on wholesale access to the MNOs’ networks to operate). 

At Phase 1, the CMA identified concerns that the transaction may result in a substantial lessening of competition (SLC) in the markets for retail and wholesale mobile services in the UK, which could lead to higher prices for customers and harm the position of MVNOs. The merger was therefore referred for a Phase 2 review on 4 April 2024. 

Following its Phase 2 investigation, the CMA provisionally concluded that the merger would indeed lead to an SLC in the aforementioned markets. Whilst the CMA acknowledged that the merger could lead to efficiencies in terms of network improvements, it believed that the merged firm would not necessarily be incentivised to follow through on its investment programme and that the merger would result in significantly fewer benefits than claimed by the parties. The CMA therefore launched a consultation on the remedies put forward by the parties to address its concerns.

Following a provisional decision last month, the CMA has now definitively approved a remedies package involving legally binding undertakings to deliver Vodafone and Three’s joint network integration and investment programme over the next eight years. This involves the merged entity consolidating and upgrading its mast sites in urban and rural areas. The CMA concluded that delivery of this programme would stimulate competition by “achieving, once fully implemented, the significant and long-lasting [network] quality and capacity improvements we have identified”.  

In addition to the above, the parties also committed to the following for at least three years: 

• price caps for selected mobile tariffs and data plans, protecting large numbers of current and future Vodafone/Three retail customers from price rises during the early implementation of the network investment programme; and 
• a Wholesale Reference Offer, pursuant to which Vodafone and Three must adhere to pre-agreed, non-discriminatory prices and contract terms to ensure that MVNOs can obtain competitive wholesale deals. 

These undertakings will be overseen by both Ofcom and the CMA, and the merged entity is required to publish an annual report setting out its progress on the implementation of the network plan. The CMA concluded that the package outlined above will address the SLC by boosting competition between MNOs in the long term whilst mitigating the short-term loss of competition between the merger parties.

A new approach from the CMA?

The CMA’s approach in this case can be contrasted with that in relation to CK Hutchison’s proposed acquisition of Telefonica Europe plc (O2 UK), which was prohibited in 2016. In that case, the CMA wrote to the European Commission (which had jurisdiction and declined to refer the merger to the CMA for review at the UK rather than EU level), expressing its “serious concerns” in respect of the transaction and stating that it considered that the only appropriate remedy was the divestment of one of the parties’ networks in its entirety (with a possibility only for “limited carve-outs” from the divested business). The CMA considered that the behavioural remedies offered by the parties fell “well short of what would be required” and were “materially deficient as they [would] not lead to the creation of a fourth Mobile Network Operator…capable of competing effectively and in the long term”. 

Despite the CMA identifying virtually identical theories of harm in respect of the Vodafone/Three merger, and irrespective of the fact that a new fourth MNO will not be created, the parties have been able to convince the CMA that their remedies will address its concerns. Those remedies are clearly very different to what the CMA would have considered acceptable in Three/O2, and from those accepted in previous mobile merger cases in the EU, which have typically involved the sale of spectrum and a commitment from the merged entity to facilitate the entry of new market participants. 

More broadly, it is only the tenth Phase 2 case in which the CMA has accepted purely behavioural remedies (i.e. without any permanent divestments), in respect of which the CMA’s position has generally been viewed as one of deep scepticism. Whilst six of the previous nine decisions involving such remedies involved price controls, five of those concerned mergers between rail franchise operators, whose prices are already regulated (the other decision concerned the acquisition of local radio stations and licences). The unconventionality of the CMA’s approach to the behavioural remedies in this case should not, therefore, be underestimated. 

This development comes at a time when the newly-elected Labour government is looking to deliver on its plan to address Britain’s lack of growth (on which see our recent article). 

In response to this drive for growth, CMA chief executive, Sarah Cardell, announced in a recent speech that the CMA will hold a review in the New Year to consider its approach to merger remedies. This review will include (amongst other things) consideration of when behavioural remedies may be appropriate and how they can preserve benefits which may offset anti-competitive effects. In this regard, it is notable that the same speech also pointed to the “flexibility” of the merger regime and the potential relevance of remedies that can “lock in efficiencies or preserve relevant customer benefits” – specifically calling out the remedies decision in this case. 

The experience that the CMA has gained in its assessment of this merger will no doubt inform its remedies review. However, it remains to be seen whether the CMA will extend this more flexible approach to mergers in unregulated sectors, where it alone will be responsible for oversight of behavioural remedies. 

Conclusion 

The CMA’s decision in the Vodafone/Three merger represents a significant development in its approach to behavioural remedies, which may evolve further following the review in the New Year. Whilst it would be premature to infer a new direction from this one decision, the pragmatism shown by the CMA will no doubt be welcomed by some – if not the merging parties’ competitors.