The UK Competition and Markets Authority (CMA) has cleared the Vodafone/Three[1]merger subject to behavioural remedies. The transaction will bring together two of the four largest UK mobile network operators and potentially transform the UK telecoms landscape. The CMA’s approval decision comes against the backdrop of widespread scepticism of consolidation in the mobile telecommunications sector across Europe.  It also departs from the CMA’s previous policy of seeking structural remedies to address competition issues and blocking problematic deals where no structural remedy could be found.

This article summarises the CMA’s decision and identifies learnings for future deals.

Background

On 14 June 2023, Vodafone and CK Hutchison agreed to establish a joint venture combining their UK telecom businesses, Vodafone Limited (VUK) and Hutchison 3G UK Limited (3UK) (the Merger). VUK and 3UK are the third and fourth largest mobile operators in the supply of retail mobile services by revenue and subscribers.  The two largest operators are BT Group plc (BTEE) and VMED O2 UK Limited (VMO2).

The CMA found that BTEE has historically positioned itself at the premium end of the market, with VUK generally being recognised as having the second-best quality network behind BTEE. VMO2 has operated a dual-brand strategy, using Giffgaff to compete in the value subsegment, and O2 in the premium subsegment. 3UK was previously ranked as the lowest-performing network, but it has recently commenced an investment programme that has significantly improved its network.

The merger would impact on competition in retail and wholesale telecommunications markets

The CMA will always review a “4-to-3” merger, such as this transaction, with particular scrutiny.  In several cases, the fact that a merger reduces the number of competitors from four to three is enough in itself to identify competition concerns.   In this case, the CMA found that the reduction of mobile providers would substantially lessen competition in two UK markets: retail mobile telecommunications services and wholesale mobile telecommunications services.

  • In the retail market, the CMA found that the Merger would lead to higher prices or reduced service offerings, such as smaller data packages, affecting over 27 million subscriptions held by the combined entity.
  • In the wholesale market, the CMA found that reducing the number of mobile network operators (MNOs) from four to three could hinder Mobile Virtual Network Operators (MVNOs) from securing competitive terms, limiting their ability to offer attractive deals to consumers.

The CMA nonetheless recognised that the deal could bring about efficiencies, and considered whether these would outweigh the competitive harm. It assessed the Parties’ post-Merger joint business plan – including a proposed investment of £11 billion in the UK to create one of Europe’s most advanced 5G SA networks – and the Parties’ agreement with VMO2 (Beacon 4.1), which involved divesting a portion of spectrum to VMO2 to allow it to enhance its own network capacity.

In relation to the proposed investments, the CMA found that the merged entity could, in principle, improve the quality of mobile networks and bring forward the deployment of next generation 5G services, as the Parties claimed. The CMA found that it would be “significantly more practically challenging” for the Parties to carry out these upgrades as independent companies.[2]  But the CMA also concluded that the Parties would lack the incentive to implement their joint business plan in full after the Merger, as they would find it more profitable to decommission a number of sites, especially in low and mid traffic areas, rather than proceed with the investment.[3]

The CMA therefore concluded that, while the Merger would bring about some efficiencies, these would not by themselves be sufficient to outweigh the competitive harm.

The Parties addressed the CMA’s concerns through behavioural remedies    

The Parties sought to address these concerns by offering undertakings that would guarantee their future investment plans.  On 5 December 2024, the CMA decided to clear the Merger, subject to these behavioural remedies. The remedies comprise: (i) a legally binding commitment to undertake the network investment programme proposed by the Parties over the next eight years; and (ii) time-limited protections for at least three years to ensure that retail customers and MVNOs continue to secure good deals before the benefits of the network investment programme are realised.

In relation to the network investment programme, the Parties have agreed to integrate their joint networks into a combined site grid, integrate a minimum number of sites in rural and urban areas, and deploy a prescribed amount of spectrum across specified frequency bands in the UK.[4]  The CMA found that these investments, combined with the impact of the Beacon 4.1 agreement with VMO2, will lead to a lower incremental cost of capacity and a longer-term reduction in the Parties’ unit cost of expanding capacity. This is largely because the CMA found that network capacity is a function of the amount of spectrum deployed multiplied by the number of sites, so increasing both the number of sites and the amount of spectrum deployed on them has a ‘multiplicative’ effect on the merged entity’s network capacity compared with the sum of the two standalone networks.

The CMA considers that this remedy will address its concerns in the retail market because both the merged entity (through the network investment programme) and VMO2 (through Beacon 4.1) will have a significant increase in capacity, and they will be incentivised to fill that capacity by making attractive offers to customers, leading to downward pressure on prices.  In terms of quality, the CMA found that this remedy would also result in “significant and long-lasting quality improvements in a way that positively affects customer experience.”[5]  The CMA also concluded that the downward pricing pressure and quality improvements will be reflected in increased competitiveness of the terms offered to MVNOs, alleviating its concerns in the wholesale market.

Even with these measures in place, the CMA remained concerned that the Merger would harm consumers and wholesale suppliers in the short term. The CMA recognised that any capacity and quality improvements resulting from network integration would be realised progressively over time. In the interim period, customers could experience price increases or reduced service without any improvements in coverage, reliability, or capacity. To address this concern, the CMA required a remedy package including “time limited protections”, including commitments to retain certain existing mobile tariffs and data plans for at least three years, and a commitment to pre-agreed prices and contract terms to allow MVNOs to obtain competitive wholesale deals.[6]

What can we learn from the CMA’s decision?

The CMA’s decision is striking because it comes against the backdrop of widespread scepticism of consolidation in the mobile telecommunications sector across Europe.  In 2016, the European Commission had prohibited a similar tie-up between O2 and Three in 2016[7] with assistance and strong support[8] from the CMA and Ofcom. 

The CMA’s decision to accept behavioural remedies also represents a departure from recent practice. The CMA’s former CEO, for example, was critical of the European Commission’s decision to accept behavioural remedies in the Google/Fitbit deal, noting that the CMA would not have followed suit had it had jurisdiction to review the deal.[9]   And Sarah Cardell, the CMA’s current CEO, recently said that “the CMA has a strong preference for structural remedies”.[10] 

However, the appetite to clear difficult mergers that could lead to efficiencies and customer benefits seems to be increasing on both sides of the Channel. The UK Government has placed economic growth at the top its agenda, threatening to “rip up the bureaucracy that blocks investment” and promising to ensure that the CMA takes growth seriously.[11] In the EU, the report of former European Central Bank President Mario Draghi into “The future of European competitiveness” has called for Europe’s competitiveness to be advanced through, among other things, a more permissive approach to merger control, in particular involving strategic European companies in the telecommunications, energy, digital, and defence sectors.[12]

In response to calls for a more accommodating policy, the CMA has signalled a change in its approach to mergers. Shortly before the clearance of Vodafone/Three, Sarah Cardell announced “a review of our approach to merger remedies” that will include considering when behavioural remedies may be appropriate, the scope for remedies that lock in rivalry-enhancing efficiencies and preserve customer benefits, and ways to move to remedy discussions “as quickly as possible” in merger investigations.[13]  This suggests that the CMA will have a more open mind to behavioural remedies going forward.

Against this background, the CMA’s decision in Vodafone/Three can already yield important insights that may be relevant for future deals:  

  • Evidence of efficiencies and customer benefits is increasingly relevant. In recent years, the CMA has rarely considered that competition concerns arising from a merger can be outweighed by potential efficiencies or customer benefits arising from the deal. This has often resulted in merger parties devoting limited time and resources to gathering and submitting this type of evidence during merger investigations. This case may change that – the CMA assessed evidence on efficiencies in detail and agreed with the Parties that the Merger could improve the quality of mobile networks and bring forward the deployment of next generation 5G networks and services. The CMA nevertheless decided to impose a remedy to ensure that these investments take place, as it doubted that the merged entity would have the incentive to go through with these planned investments after the deal closed. But the basis of the remedy was the Parties’ detailed business plan, which was developed long before the merger investigation began. The CMA noted that the business plan was credible, reflecting “detailed due diligence by external consultants and significant time and resource investment by the Parties”[14], suggesting that claims by merger parties of proposed efficiencies must be backed up by strong evidence.
  • Behavioural remedies may be more likely to be accepted in regulated industries. The CMA was willing to accept behavioural remedies in part because the Parties operate in a regulated sector and are monitored by Ofcom. Ofcom’s role in overseeing the proposed remedy significantly reduces the monitoring, implementation, and enforcement risks for the CMA, all of which form part of its assessment in deciding whether to accept a remedy.[15]  The CMA has recognised the importance of Ofcom as an expert monitor and noted that, consistent with its guidance, “the likelihood of effective monitoring of a remedy will be significantly increased if it is possible to involve a sectoral regulator in the monitoring regime.”[16]
  • Support from sectoral regulators in regulated industries can be crucial. The CMA took account ofOfcom’s support for the deal when considering whether to accept the remedies being proposed. Ofcom has said that the Merger and the Parties’ commitments could provide “long-lasting” benefits.[17] This stands in contrast to its stance in relation to the proposed merger of O2 and Three (ultimately prohibited by the European Commission[18]), where Ofcom’s chief executive publicly criticized the deal and warned that it could lead to higher prices and businesses.[19] The support of a sectoral regulator is important to the CMA’s assessment not just because of its expertise and understanding of the relevant sector, but also because it will have “the primary role in monitoring compliance” [20] with the remedy.
  • Pre-empting concerns from third parties through contractual agreements can be effective. The CMA has typically been reluctant to accept that competition concerns can be addressed through contractual agreements entered into by merger parties with third parties outside of the formal remedies process. This is partly because, in the CMA’s view: “over time contracts may be renegotiated or terminated, and firms may waive their rights to enforce any breaches in light of their overall bargaining position.”[21]  In this case, however, the CMA placed considerable weight on the potential benefits arising from the spectrum divestment to VMO2, as described above. This is likely because: (i) the agreement involves a one-off structural divestment, rather than an ongoing contractual relationship; and (ii) the Parties have likely made the agreement conditional only on the Merger closing. This agreement appears to have secured VMO2’s support for the deal, leaving BTEE as the only major MNO complainant.
  • The CMA’s willingness to accept behavioural remedies depends on their being a clear means of monitoring compliance. The Parties’ original business plan envisaged an investment of £11 billion in the UK over ten years to create one of Europe’s most advanced 5G SA networks. This type of high-level business plan, though potentially beneficial for customers, is difficult for antitrust regulators to monitor and enforce. In this case, the CMA, informed by Ofcom, found that it would be difficult to monitor compliance of any ‘output-based’ approach, i.e., one that would measure outcomes delivered to customers by way of coverage, speed, latency, etc.  Instead, the Parties had to offer input-based commitments, which would measure the delivery of the physical network (i.e., sites and spectrum deployed). Although preferable from a regulatory standpoint, an input-based remedy can significantly reduce the merged entity’s flexibility to execute on its business plan. It may also require significant amendments as the market develops over the coming years, which would rely on obtaining consent from the CMA and Ofcom.
  • Mergers that help to promote investment and growth are more likely to be cleared. The CMA has stated that “investment in mobile networks requires a long-term perspective [and] the boost to competitive rivalry … that will result from the Network Commitment will grow over time as the investment and integration plan is implemented.”[22]  This is in line with the new Government’s economic growth agenda, and the CMA’s programme of work to support the Government’s growth mission.[23]  The CMA may be expected to look more favourably on future deals involving investment commitments in strategic sectors.

Conclusion

Although the Vodafone/Three case has a number of specific characteristics conducive to behavioural remedies – notably that the Parties operate in a regulated sector overseen by Ofcom – the CMA’s decision is nevertheless a significant development.  It comes amidst a discernible shift in policy by the CMA, indicating an increased willingness to be flexible in identifying remedies to competition concerns, particularly where there is evidence of potential efficiencies or customer benefits.  

[1]  See CMA, Vodafone / CK Hutchsion JV merger inquiry case page (available at: https://www.gov.uk/cma-cases/vodafone-slash-ck-hutchison-jv-merger-inquiry).

[2] Summary of Final Report, paragraph 47.

[3] Summary of Final Report, paragraph 48.

[4] Final Report, paragraph 16.28.

[5] Summary of Final Report, paragraph 76.

[6] Summary of Final Report, paragraphs 89 – 93.

[7] See Case M.7612 Hutchison 3G UK / Telefónica UK.

[8] See letter from Alex Chisholm (then CMA Chief Executive) to Margrethe Vestager, 11 April 2016 (available at https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/515405/CMA_letter_to_Commissioner_Margrethe_Vestager.pdf)

[9] See Mlex, Google-Fitbit’s EU behavioral remedies would likely have failed in UK, CMA chief says.

[10] CMA, Sarah Cardell: the future of UK merger control, 20 November 2023 (available at: https://www.gov.uk/government/speeches/sarah-cardell-the-future-of-uk-merger-control).

[11] See UK Government, Press Release, Major investment deals set to be announced at government’s inaugural International Investment Summit as PM vows to ‘remove needless regulation’ declaring Britain open for business, 14 October 2024 (available at: https://www.gov.uk/government/news/major-investment-deals-set-to-be-announced-at-governments-inaugural-international-investment-summit-as-pm-vows-to-remove-needless-regulation-declar#:~:text=%E2%80%9CWe%20will%20rip%20out%20the,seriously%20as%20this%20room%20does.%E2%80%9D).

[12] See European Commission, The future of European competitiveness, September 2024 (available at: https://commission.europa.eu/topics/strengthening-european-competitiveness/eu-competitiveness-looking-ahead_en).

[13] See Sarah Cardell, Driving growth: how the CMA is rising to the challenge, 21 November 2024 (available at:https://www.gov.uk/government/speeches/driving-growth-how-the-cma-is-rising-to-the-challenge).

[14] Final Report Summary, paragraph 47.

[15] CMA87, Merger Remedies Guidance, paragraph 7.4.

[16] Final Report, paragraph 16.393.

[17] Final Report, paragraph 16.151.

[18] European Commission, Press release: Mergers: Commission prohibits Hutchison’s proposed acquisition of Telefónica UK, 11 May, 2016 (available at: https://ec.europa.eu/commission/presscorner/detail/pt/ip_16_1704).

[19] See Financial Times, UK regulator calls for blocking of O2 and Three, January 31, 2016 (available at: https://www.ft.com/content/10bd9d7a-c68f-11e5-808f-8231cd71622e).

[20] Final Report, paragraph 16.679(a).

[21] CMA129, Merger Assessment Guidelines, paragraph 7.15.

[22] Final Report Summary, paragraph 89.

[23]  CMA, Press Release, CMA launches programme of work to support growth mission, 24 October 2024 (available at: https://www.gov.uk/government/news/cma-launches-programme-of-work-to-support-growth-mission).