Vodafone share price gains on merger news, but what next?

Vodafone’s share price got a lift following news that it plans to merge with Three owner CK Hutchison. The merger will create the UK’s largest mobile operator, should it get past the competition regulator. This comes as Vodafone continues to be dogged by slow growth.

• Three owner Hutchison and Vodaphone strike £15bn deal to create UK’s biggest mobile operator.
• Deal could potentially still be blocked by the Competition and Markets Authority.
• VOD share price is down over 12% this year and 42% over the 12-month period.

Vodafone’s [VOD.L] share price dialled up the gains Wednesday as news broke that it would merge with Three’s parent company CK Hutchison [0001.HK]. Should the £15bn merger go through, it will create the UK’s largest mobile operator. But the deal will be closely scrutinised by the UK’s Competition and Markets Authority (CMA). 

The merger comes at a time when investors are hanging up on Vodafone’s stock. Year-to-date, the VOD share price is down over 12%, and almost 42% over the 12-month period. This past month reception has continued to be poor, with Vodafone’s share price down over 10%, to close Friday 16 June at 73.71p.

Vodafone’s share price up on merger talks

Vodafone will control 51% of the new entity, while CK Hutchison will own 49%, according to Reuters.

Vodafone said that the deal would result in cash savings of more than £700m in its fifth full year after completion, although implementation costs in the first five years are expected to be £500m. Vodafone will have the right to buy the new entity after a three-year lock-up period.

The deal is expected to close in 2024, subject to regulatory approval. This will be a tough challenge, as the CMA has been unafraid to show its teeth. Seven years ago, the watchdog blocked Three’s planned takeover of O2 on concerns it would increase customer bills. This year the CMA squashed Microsoft’s [MFST] takeover of Activision Blizzard [ATVI].

Hutchison and Vodafone will need to demonstrate the merger benefits the British public and increases 5G coverage in the UK. Vodafone said that the new entity would deliver £5bn per year in economic benefits by 2030, with its 5G network reaching 99% of the UK population by 2034.

“As a country, the UK will benefit from the creation of a sustainable, strongly competitive third scaled operator – with a clear £11bn network investment plan – driving growth, employment and innovation. For Vodafone, this transaction is a game changer in our home market. This is a vote of confidence in the UK and its ambitions to be a centre for future technology,” said Margherita Della Valle, Vodafone CEO.

Rolling out a 5G network costs money. Ofcom, the regulatory and competition authority for broadcasting, has also said that companies in the market are unlikely to see a return on 5G investment without consolidation. In March Three CEO Robert Finnegan said that returns continue to be below the cost of investment. Finnegan added that the current market was “unsustainable”.

The VOD share price, which had opened at 72p, rang up an intraday high of 75p on Wednesday 14 June, before closing at 73p.

Vodafone faces growth challenge

Away from the merger, the wider story is one of debt and lacklustre performance. Vodafone is saddled with over €33bn in debt at the last count. While that is down from the previous year, it’s still high. The other danger is a slowdown in Vodafone’s core European markets, particularly Germany, which had a 1.6% decline in service revenue growth last year.

Overall group revenue for Vodafone’s fiscal full year 2023 was up a mere 0.3% to €45.7bn. Admittedly, operating profits climbed 145.9% to €14.3bn, but this was largely down to the disposal of Vantage Towers [VTAGY].

Vodafone acknowledged that its business had worsened over time, which had a knock-on effect on customer experience in its full-year report, with proposed remedies including the reallocation of investment and shedding 11,000 jobs in an effort to streamline.

There have been other headwinds. Vodafone’s Turkish and Kenyan businesses were affected by the weak lira and Kenyan Shilling. Vodafone Idea [IDEA.NS], its Indian business, was recently on the verge of collapsing. In January it emerged that the entity had sought a $849m loan to pay off debt.

Should the merger with CK Hutchison deliver cost savings through increased scale, then Vodafone and Three could benefit. However, the proposed efficiencies are still a few years off, and in the meantime the regulator will have a say on whether the deal can even go through.

Vodafone’s share price has a 12-month median target of 102.36p from analysts. Hitting this would see a 38.9% upside on Friday’s close.