Vodafone/Three JV cleared in UK with behavioural remedies: key takeaways and implications for future deals

On 5 December 2024, the UK Competition and Markets Authority (CMA) conditionally approved the creation of a joint venture (JV) combining the UK businesses of Vodafone Group plc and Three UK subject to behavioural remedies. The CMA confirmed acceptance of a remedies package previously outlined in a remedies working paper published on 5 November 2024, including a legally binding commitment to undertake an £11 billion network investment programme and time-limited price caps on key tariffs pending roll-out of the 5G standalone network envisaged by the investment programme.

This is a significant decision which marks a notable departure from the CMA's typical preference for structural remedies to address competition concerns in the mergers context (or prohibition, if no structural remedies are feasible). The key takeaways for businesses (both in the telecoms sector and beyond) can be summarised as follows:

• This is the first time that the CMA has approved a 4-3 transaction in the telecoms sector based on behavioural remedies, and is in marked contrast to the CMA's stance on a previously mooted 4-3 transaction in the UK telecoms sector (Hutchison 3G UK/ Telefonica UK) that was prohibited by the European Commission in 2016.
• The CMA's decision comes in the wake of recent statements by CMA CEO Sarah Cardell emphasising that "every deal that is capable of being cleared either unconditionally or with effective remedies should be" and the announcement of a review of the CMA's approach to merger remedies in early 2025.
• It also aligns with recent messaging from the CMA highlighting competition as a driver of growth and innovation and the Government's recent Industrial Strategy Green Paper emphasising the importance of regulators prioritising investment in the UK economy, including in the telecoms sector.
• However, the extent to which this decision indicates a wider shift in approach by the CMA remains to be seen (particularly in non-regulated sectors).
• There were a number of important factors in this particular case which likely moved the dial towards acceptance of behavioural remedies, including the support of the sector regulator Ofcom (which also agreed to take the primary role in monitoring and enforcing compliance), the support of a major competitor and the particular importance of investment in the markets for mobile telecoms services.
• Nonetheless, the pragmatic approach adopted by the CMA in this case appears to signal a willingness to accommodate tailored solutions for complex, high-investment, regulated sectors and, combined with recent messaging from the CMA, suggests that the CMA may be becoming more open to considering behavioural remedies more generally on a case-by-case basis.

We consider the CMA's decision in more detail below, including the background to the transaction, the competition concerns identified by the CMA, the remedies package and potential implications for future deals in the telecoms sector and beyond. 

Background

The Vodafone/Three JV is a 4:3 merger combining the third and fourth largest mobile network operators (MNOs) in the UK to create a new largest MNO serving over 27 million subscriptions.  It is intended to give the parties the scale needed to compete more effectively with larger competitors, BT/EE and Virgin Media O2 (VMO2). The merging parties argued that the transaction would result in significant efficiencies, improving the quality of mobile networks and enabling them to accelerate the deployment of advanced 5G mobile network infrastructure through an £11 billion post-merger network investment programme.

Competition concerns identified by the CMA

The CMA recognised that the deal could result in efficiencies, including faster 5G rollout. However, it was concerned that it would also substantially lessen competition in two markets:

1. Retail Mobile Services: The CMA identified concerns that the reduction of MNOs from four to three could lead to higher prices, reduced service quality, and fewer options for consumers. The CMA projected an annual consumer cost of £216 million absent adequate remedies, primarily driven by potential price increases.
2. Wholesale Mobile Services: The CMA was also concerned that competition in wholesale services, particularly among Mobile Virtual Network Operators (MVNOs) such as Tesco Mobile and Sky Mobile, could be harmed. MVNOs rely on access to competitive wholesale terms to sustain their retail offerings.

The CMA also questioned whether the parties would have sufficient incentives to implement the proposed network investment programme in full post-merger, in light of evidence that suggested it would be more profitable to decommission sites in low and mid traffic areas rather than proceed with the investment programme.

The agreed remedies package

The CMA approved the JV subject to a behavioural remedies package agreed with the merging parties, with the support of Ofcom. The remedies are designed to address the CMA's concerns about the impact of the deal on competition and ensure that the merging parties deliver the efficiencies and pro-consumer benefits cited in support of the transaction. Key elements of the package include:

1. Network Investment Commitment

• The merging parties have given legally binding commitments to undertake the proposed network investment programme, investing £11 billion over the next eight years. They will develop a 5G standalone network, expanding network capacity and improving geographic coverage with a particular focus on rural and underserved areas.
• Enforceable milestones have been agreed to ensure adherence to the investment programme, with a notable focus on input-based commitments relating to delivery of the physical network measured on the basis of number of sites and spectrum deployed (rather than output-based commitments measured by reference to outcomes delivered to customers in terms of coverage and speed etc).

2. Price Caps

• To protect retail consumers from short-term price increases post-merger, the parties have agreed to retain certain existing tariffs and data plans for at least three years (pending the roll-out of the 5G standalone network).

3. MVNO Safeguards

• The merging parties have committed to pre-agreed, non-discriminatory terms for MVNOs, to ensure continued access to competitive wholesale pricing and network resources.
• Contracts with MVNOs expiring during the transitional period will be rolled over under existing terms, to provide stability for MVNOs and their customers while the transaction is being implemented.

4. Spectrum Sharing

• The merging parties agreed to continue their existing spectrum-sharing arrangement under the Beacon 4.1 agreement with VMO2. This arrangement involves shared use of certain network resources, which the merging parties suggested would maximise spectrum efficiency, particularly in areas where capacity is constrained.

5. Monitoring and enforcement

• The parties are required to provide annual reports to track progress against the agreed milestones, with ongoing monitoring undertaken primarily by Ofcom. The merging parties have acknowledged that failure to meet the milestones could result in extended protections or additional measures being imposed by the CMA.

What does the CMA's decision mean for future deals in the telecoms sector and beyond?

Looking beyond this particular deal, the CMA's decision provides valuable insights for businesses seeking to predict how the CMA might approach future transactions, particularly in sectors reliant on significant infrastructure investment.

• As noted above, this decision represents a notable departure from the CMA's typical preference for structural remedies (and in the absence of feasible structural remedies, prohibiting the transaction).
• There were a number of important factors in this particular case which moved the dial towards acceptance of behavioural remedies, and it remains to be seen whether the CMA would adopt the same approach in other regulated sectors, or indeed in non-regulated sectors.
• However, recent indications from the CMA suggest that it is increasingly willing to consider behavioural remedies on a case-by-case basis, and this decision suggests that parties may be pushing against a "more open door" where strong efficiencies arguments can be presented and a credible and detailed remedies proposal is developed.
• Securing the support of Ofcom for the behavioural remedies package (and Ofcom agreeing to take on the primary role for monitoring and enforcement) appears to have been critical to the CMA's acceptance of the remedies package in this case. Gaining the backing of the sector regulator should be a key consideration for parties in future deals in regulated sectors.
• Another important factor in the CMA's decision to accept behavioural remedies appears to have been the limited competitor objections. Proactive third party engagement and anticipation of potential competitor concerns is therefore something which parties to future deals should also consider carefully.
• Finally, it is notable that the CMA's approach in this case aligns with recent calls at both UK and EU-level to ensure that an overly interventionist approach does not stifle innovation and investment in key sectors that are critical to economic growth and of significant importance to large numbers of consumers.
• In addition to the UK Government's recent Industrial Strategy Green Paper referred to above, the Draghi Report presented to the European Commission in September 2024 notably called for a softer approach to telecom mergers and encouraged prioritisation of investment in connectivity through ex-post regulation, intervening only when competition issues arise, rather than blocking mergers pre-emptively based on potential concerns (see our previous blog post on the Draghi Report here). This perspective reflects a growing recognition of the need to balance competition law with the significant economic benefits of investment and innovation in critical infrastructure.

If you have any questions about the implications of this decision or require advice on navigating UK merger control in respect of a proposed transaction, please contact our team of experts.