Vodafone and Three UK Announce Merger; Regulatory Hurdles and Limited Synergies Main Hurdles

Vodafone and CK Hutchison (Three UK) announced the merger of their mobile businesses in the U.K. Vodafone will own 51% of the new entity, with an option to buy CKH’s stake if the enterprise value of the merged business increases to at least GBP 16.5 billion. This move, if approved by the Competition and Markets Authority, or CMA, would reduce the number of mobile operators from four to three in the U.K., consolidating the market and allowing the merged entity to earn better returns on invested capital, or ROIC. Vodafone and Three UK have had poor ROICs historically due to lack of scale. We are maintaining our fair value estimates for Vodafone and CK Hutchison.