Will the Three – O2 Merger Go Through?

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These last five years have been an interesting time in the telecommunications market. From the moment that the UK’s two biggest mobile networks, Orange and T-Mobile, joined forces to become EE, there’s been less competition in the market but more money than ever before. It’s also been a time that’s seen growth at the major networks stagnate, as most adults and now even many teens have mobile contracts, there just aren’t that many new customers to entice into a contract.

In more recent times, BT look to complete their purchase of EE and make a return to the mobile telecommunications market and even Virgin Media and Vodafone were considering a merger in order to compete in the new environment. Now, Three and O2 are attempting a merger worth just north of £10 billion, but why would they attempt such a thing, and will it even go through?

It’s not a move without precedent, because CK Hutchison (who own Three) already purchased O2’s holdings in Ireland, and now they’re attempting to purchase the remainder of their UK operations in order to create the biggest mobile network in the UK, even bigger than EE. A spokesperson for O2 said that the deal will results in the ‘most customer-centric mobile operator in the UK’, and that the deal would result in better value, quality and innovation for British customers.

The reasons for the purchase are, as you’d expect, financial. For years, Three suffered with losses in the UK marketplace but it’s grown strong, and its parent company is flush with cash. Unfortunately though, the UK mobile market is an intensely competitive one, and with thin profit margins on phone contracts, it makes good financial sense to take out a potential competitor and dramatically increase the number of subscribers on your network.

That reduction in competition, however, is exactly what might see the deal scrapped by the various regulatory bodies that have a say in such things. The UK benefits from having a number of very strong regulatory bodies, like Ofcom, which operate in the interest of British consumers. Should the Three-O2 deal go through, it’ll mean that there’s only three mobile operators left on the high street: Vodafone, Three & EE.

Just a few years ago, the high street features Orange, T-Mobile, O2, Three and Vodafone, meaning that there was plenty of competition to ensure that competition on contract prices and service quality was kept up. Naturally then, the notion of losing that competition gives Ofcom a headache.

In a recent speech, Ofcom’s chief executive Sharon White said that “four operators is a competitive number” and that having four companies competing for customers had delivered “good results for consumers and sustainable returns for companies”. These comments indicate that Ofcom consider four to be the bottom end of acceptability for competition in the UK, and state that they would consider any number lower than that unacceptable – bad news for Three and O2.

CK Hutchison, however, say they’ve got no intention of killing the O2 brand in the UK, and would move to float O2 on the stock market once it merges with Three, once again putting the company back in public ownership. According to the co-managing director at Whampoa, Mr Canning Fok, the investor group who is helping to fund the takeover of O2 have a “liquidity requirement” which means that they would seek an immediate return on investment and that “one way to provide that will be an IPO”. The two companies, however, would share a management structure, with Three boss David Dyson leading the newly combined company, leaving Ronan Dunne without a position.

Ofcom would, of course, seek reassurances of this fact, and ideally request that they don’t combine their management structure if the deal would go through.

Customers, too, haven’t been too excited about the proposition of becoming Three customers. The O2 0844 800 3125 contact number has been busy with customers who purposely left Three for O2, only now to find out that O2 will become a part of Three. Needless to say, they feel cheated, but if the deal does go through, it should absolutely see some benefits for existing customers.

Primary among these advantages will be increased coverage. By combining their networks, customers will instantly get coverage in places where they didn’t before and stronger signal everywhere else. So, with Three’s superb 4G coverage and O2’s great 3G/2G coverage, we should see a much improved service for both sets of customers.

Only time will tell whether the deal gets the required regulatory approval, but both companies will be making their appeal to Ofcom in order to see the deal become a reality. As consumers, we wait to see what will become of the telecommunications market should the deal go ahead, but in the worst case scenario we might well see the cost of our phone contracts increase.

 

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