Vodafone Group confirmed long-running speculation over a merger with 3 UK, revealing the companies are in talks over a deal it argued will provide the necessary scale to accelerate the rollout of 5G and up rural broadband access.

The terms under discussion involve Vodafone taking a 51 per cent stake in the joint entity, with the remainder owned by3 UK parent CK Hutchison. No cash will be exchanged.

Vodafone added there was no guarantee a final agreement would be reached and did not offer a provisional timeline.

It stated the “merged business would challenge the two already consolidated players for all UK customers and bring benefits through competitively-priced access to a third reliable, high quality and secure 5G network”.

GSMA Intelligence figures for Q2 estimates the combined connections at 25.8 million.

This would see the combined company top the market, with the recently merged Virgin Media O2 placed second at 24.1 million and BT’s EE with 22.4 million.

Market issues
News of discussions on a tie-up comes as little surprise, given previous media speculation and remarks by executives in both camps.

Vodafone CEO Nick Read has regularly referred to the UK as a country with a high number of operators, while highlighting its active moves towards in-market consolidation in some of its European operations.

On the 3 side, executives have also bemoaned the level of competition in the country, branding the market as dysfunctional.

Any deal would have to go through a number of regulatory steps including regulator Ofcom, which had been sceptical of a proposed tie-up between 3 and O2 which was subsequently blocked by the European Commission (EC) in 2016. The EC decision was annulled four years later, though the deal was already long abandoned.

However, earlier this year Ofcom hinted it may now be more open. In a consultation on the future of the mobile market, it clarified it would take into account “how markets are evolving” in its assessments.

Discussing the potential deal, CCS Insight director consumer and connectivity Kester Mann noted scale was the leading motivation for the parties.

“Under the status quo, it’s hard to see either operator growing enough organically to get close to challenging BT and Virgin Media O2 for size in the UK.”

“Not so long ago, a tie-up between Vodafone and Three would have felt like an unnatural pairing. But in recent times, Vodafone has taken on more of a challenger role in its home market, so the two operators’ strategies may no longer be too far apart.”