Vodafone in talks for UK merger with Hutchison's Three

  • Merger would create new leader in British mobile market
  • Vodafone in talks about creating a 51%-49% joint venture
  • Deal structured using debt, with no cash consideration
  • Vodafone shares rise 2.5%

LONDON, Oct 3 (Reuters) - Vodafone (VOD.L) is in talks with CK Hutchison (0001.HK) about merging their businesses in Britain to create a market leading mobile network that could accelerate the roll-out of 5G services and expand broadband availability.

Vodafone said on Monday it would own 51% and Hutchison 49% under the deal being discussed, with the stakes achieved by adjusting ownership of debt rather than exchanging any cash.

Combining Vodafone UK and Hutchison's Three, Britain's third and fourth largest networks respectively, would create a business with about 27 million mobile customers - more than current leaders BT's (BT.L) EE and Virgin Media O2.

"By combining our businesses, Vodafone UK and Three UK will gain the necessary scale to be able to accelerate the rollout of full 5G in the UK and expand broadband connectivity to rural communities and small businesses," Vodafone said in a statement.

The two companies hope to strike a deal by the end of the year, according to an earlier Sky report.

Shares in Vodafone, which touched a two-year low earlier on Monday, closed up 2.5% at 104 pence.

Vodafone Chief Executive Nick Read said in February the company was pursuing mergers in multiple European markets to improve returns where players barely cover the costs of the capital required to invest in networks.

Regulators have previously opposed deals that reduce the number of networks in major markets from four to three, but there have been signals that position has changed since the COVID-19 pandemic. read more

Hutchison attempted to buy Telefonica's O2 network in Britain seven years ago but was blocked by regulators.

Telefonica went on to create a joint venture with Liberty Global's Virgin Media, creating a fixed-line and mobile operator to challenge former incumbent BT.

Vodafone noted in its statement that regulator Ofcom had described Vodafone UK and Three UK as sub-scale operators, which lacked the size to earn their cost of capital and therefore could fall further behind the two market leaders.

Read has argued that the pandemic highlighted the importance of fast and reliable networks, creating a "tailwind of engagement" with governments.

Regulators, however, will be reluctant to approve a deal that reduces competition during a cost-of-living crisis, with customers already facing higher bills, analysts have said.

Vodafone said on Monday the merger could bring benefits through "competitively priced access" to larger 5G network, for example for mobile virtual network operators.

These players, which include Tesco Mobile and Sky, have built a significant share of the British mobile market.

UNDER PRESSURE

Read, under pressure from long-suffering investors to improve returns at the pan-European operator, had named Britain as one of four major markets that would benefit from consolidation.

Vodafone missed out on a deal in Spain, where rivals Orange and MasMovil are pursuing a merger to challenge Telefonica, while it rejected a offer for its business in Italy from Xavier Niel's Iliad earlier this year.

Niel acquired a 2.5% stake in Vodafone this month, bringing another possible activist to its register in addition to Cevian Capital.

($1 = 0.8944 pounds)

Reporting by Paul Sandle, Sachin Ravikumar and Muvija M; Editing by William James, Mark Potter and David Gregorio

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