Vodafone and Three-owner CK Hutchison have warned that crucial investment in 5G mobile networks would be curtailed unless regulators allow them to merge to create the UK’s largest operator.

The plan, announced on Wednesday, will create a mobile network with 28mn customers that would leapfrog EE as the UK’s largest mobile group. It will also reduce the number of networks in the UK from four to three, and will face a battle for regulatory approval given the risk of less choice and higher prices for consumers.

Under the deal, Vodafone will merge its domestic business with CK Hutchison’s Three UK. Vodafone will own 51 per cent and Hong Kong-based Hutchison 49 per cent of the combined group.

After more than a decade of frustrated attempts by mobile groups to merge in the UK, executives at the two companies hope the deal will increase profits in what they argue is an overcrowded market.

But analysts expect it to face intense scrutiny from the Competition and Markets Authority, which has longstanding concerns about market concentration. The combined group would also have almost half of the UK’s mobile spectrum, much higher than the limit of 37 per cent set at the last auction of 5G bandwidth.

On Wednesday, Hutchison said customers “will pay the same and obtain considerably more value due to the significantly better network”, while executives at both companies argued they needed to merge to give them a secure financial footing to invest in 5G networks.

The two companies have promised that the combined business will invest £11bn in the UK over 10 years to create one of Europe’s most advanced standalone 5G networks to support UK government targets.

Vodafone UK chief executive Ahmed Essam will be head of the new group and Three UK CFO Darren Purkis will be chief financial officer.

Essam said that the UK was lagging behind North America and parts of Asia on 5G rollout, and argued that as separate companies it was “not sustainable to maintain current levels of investment”.

Three UK has had low investment and low returns for many years, and has earned less than its cost of capital since 2019.

The two companies are likely to need to offer regulators concessions, according to analysts, such as selling some mobile spectrum.

Essam said that spectrum should not be an issue given the regulator would need to assess holdings in a three, rather than four, company market. He said that it was too early to talk about possible remedies for antitrust concerns, adding that the company had a “strong case” to put to the CMA.

Paolo Pescatore, analyst at PP Foresight, said Vodafone and Three UK already outperformed the market on customer growth. “This is why it’s a hard sale in the eyes of the regulators . . . Why should these two companies come together, reducing choice that potentially could lead to higher prices? It’s hard to justify.” 

Hutchison said that at least 7mn customers would benefit from better network performance immediately and the deal would also allow the group to invest in the UK’s 5G network.

It said both groups “currently lack the necessary scale on a standalone basis to earn their cost of capital, which puts at risk their ability to invest efficiently and sustainably”.

Synergies could add up to £7bn over five years, the companies said. Executives said that it was too early to comment on the impact on jobs but admitted there would be some duplication.

Vodafone’s chief executive Margherita Della Valle said she expected an overall positive impact on jobs because of the 5G investment.

No cash will be paid, but the two sides will contribute different debt amounts owing to their respective shareholdings.

Vodafone UK will take out £4.3bn and Three UK £1.7bn in cash from existing debt, leaving the merged group with debts of about £6bn. Vodafone will have the right to buy the whole business after three full years if it exceeds an enterprise value of £16.5bn.

The deal could also be called in under the UK’s National Security and Investment Act, according to analysts at Berenberg, given CK Hutchison’s Chinese ownership and Vodafone’s contracts with the UK government.

Essam said the deal would be vetted for national security.

The deal comes a month after Della Valle announced plans to axe 11,000 jobs over the next three years.

She said on Wednesday: “The UK will benefit from the creation of a sustainable, strongly competitive third scaled operator, with a clear £11bn network investment plan.”

Canning Fok, group co-managing director of CK Hutchison said: “Three UK and Vodafone UK currently lack the necessary scale on their own to earn their cost of capital. This has long been a challenge for Three UK’s ability to invest and compete.”

Hutchison is a Hong Kong-listed conglomerate with businesses ranging from retail and ports to telecoms.

Vodafone and Hutchison have argued a UK merger would enable the scale of investment required to roll out 5G networks and improve broadband connectivity.

However in the past, regulators have resisted deals that would cut the number of major operators from four to three.

In 2016, EU regulators blocked Hutchison’s first attempt at consolidation in the UK, stopping its deal to buy O2 in the UK from Telefónica to create a mobile operator that would have controlled about 40 per cent of the market. The CMA also opposed the merger as did the UK telecoms regulator Ofcom.

However, in February, Ofcom said its decision on any merger of the big four UK operators would now be “informed by the specific circumstances of that particular merger, rather than just the number of competitors”.

James Gray, managing director of mobile industry consultancy Graystone Strategy, said that since the Three UK-O2 merger was overruled, “there has been quite a lot of market changes . . . [including] the successful merger of Virgin Media-O2 and consolidation of networks across Europe.

“There seems to be a general sense that in the right market conditions, consolidation can be a positive thing.”

The CMA said: “Both Vodafone and Three are key players in the UK communications market — with millions of consumers and many businesses relying on their services — so it’s right that the CMA reviews the impact this deal could have on competition.”

Additional reporting by Kate Beioley