A new tone? What to infer from the CMA’s decision on Vodafone/Three

The UK Competition and Markets Authority’s (CMA) approval of the Vodafone/Three merger has been widely interpreted as a significant change in its approach to merger control, signalling a greater openness to behavioural remedies. Our view is that this is a less dramatic shift. We set out why the specific circumstances of the merger and the UK mobile industry mean that this decision represents a modest evolution in the CMA’s approach rather than a revolutionary change, and what this might mean for behavioural remedies going forward. 

The CMA’s Vodafone/Three decision 

The CMA has approved the £16.5bn merger between Vodafone UK and Three UK, two of the UK’s four mobile network operators (MNOs). The approval is conditional on an investment remedy – where the companies will sign binding commitments to roll out an extensive, high quality 5G network across the UK – and short-term customer protections. 

Under the plan, the companies will invest billions of pounds to upgrade, integrate and make improvements to their combined network over the next eight years. These quality improvements will boost competition between MNOs and benefit millions of mobile customers, according to the CMA. 

An increased openness to behavioural remedies? 

Traditionally, the CMA has favoured structural remedies to address antitrust concerns in mergers. Many commentators have therefore interpreted the CMA’s decision to accept these remedies as a “paradigm shift”, signalling an increased willingness to accept behavioural remedies.  

CMA Chief Executive Sarah Cardell also recently announced a review into the CMA’s approach to merger remedies, which will look at the scope for accepting more behavioural remedies. The focus is on remedies that drive greater competition or lock in benefits for consumers. Cardell positioned this in the wider context of the CMA’s role to support the government’s growth mission and industrial strategy. 

Not so fast… Merger- and industry-specific factors matter 

Notwithstanding the Vodafone/Three decision and Cardell’s comments, it is too soon to infer a radical change in the CMA’s approach to merger review. The decision in particular is very much case-specific. It reflects both the conditions of competition in the UK mobile market and the fact that telecoms is a sector with its own independent regulator.  

Take the market first. The CMA was looking at a market with two larger players and two smaller players. Of the two larger players, VMO2 has the largest subscriber base but faces capacity constraints and has the lowest network quality, while BTEE also has a large customer base, but has consistently had the highest overall network quality. 

In contrast, the two smaller operators, Vodafone and Three, are both earning returns below cost of capital, as recognised by Ofcom. Both companies have been constrained in their ability to invest and compete with the larger players. 5G accentuates this challenge – advanced 5G networks require significantly more capital expenditure than previous generations of mobile technology. 

The CMA accepted that the transaction could address these challenges. 

First, by combining their site and spectrum portfolios, the transaction changes the economics of network deployment for Vodafone and Three, which the companies argue gives them the ability and incentive to invest in a far superior combined network. The CMA recognised that there is likely to be a marked difference between the scale and network quality performance that the companies could deliver jointly with the merger.  

Second, to unwind some of the existing network sharing agreements, the parties agreed to transfer some of their spectrum to VMO2, relieving VMO2’s capacity constraints.  As a result, VMO2 will also become a stronger competitor. 

The CMA concluded that rather than reducing competition, the merger has the potential to boost competition in the long term in both retail and wholesale markets – but only if the merged entity does indeed invest heavily in its new combined network. 

Here the CMA had concerns: could it rely sufficiently on the companies’ claims that they would be incentivised to follow through fully on their proposed investment programme? It was not sure but satisfied itself that with the right kind of network investment commitment it would not need to worry. Hence, its first remedy is a requirement on the companies to integrate their joint networks into a combined site grid with a prescribed number of sites in rural and urban areas and to deploy a specified amount of spectrum at each site. 

Although this remedy is behavioural in the strictest sense, when combined with the spectrum sale to VMO2, it will lead to long-term structural changes in the UK’s mobile market. Once the companies have sunk the costs of network deployment, their competitive incentives are changed for good. 

But network deployment takes time, which means its competitive benefits will not be felt in full immediately. From the CMA’s perspective, that created a concern that in the short term there could be a weakening of competition. It has therefore also required protections for retail and wholesale customers against any short-term competition concerns that might arise before the joint network is fully rolled out. These include commitments to retain certain existing mobile tariffs and data plans for at least three years, and a commitment to offer pre-agreed prices and contract terms to allow mobile virtual network operators to obtain competitive wholesale deals. While these are unambiguously behavioural remedies, they are time-limited by the structural effects of the network commitment. 

The other critical distinguishing factor in this case is the presence of Ofcom as the sectoral regulator. It is common practice in cases where there is a sectoral regulator for the CMA to seek that regulator’s views. But Ofcom also provides an extra enforcement mechanism upon which the CMA can rely. 

For the network investment commitment, Ofcom already collects much of the relevant data as part of its existing regulatory functions. It is straightforward for Ofcom to extend its role to monitoring the merged entity’s network roll-out and it demonstrably has the skills to do so. For the pricing commitments, Ofcom also has the right capabilities to monitor and enforce, significantly reducing the burden the remedies will place on the CMA. Indeed, the CMA has been clear that regulated industries such as telecoms may have a special place in its review of behavioural remedies because of the role that sector regulators can play.  

Where next on behavioural remedies? 

Ultimately, these case-specific factors in the Vodafone/Three merger mean that the jury is still out on the CMA’s wider approach to behavioural remedies. Indeed, CMA Chief Economic Adviser Mike Walker said at a recent event that the CMA’s decision was “pretty standard” and “not a paradigm shift”. In our view, while the increased flexibility and pragmatism shown by the CMA in this case and its upcoming review will be welcome by dealmakers, the CMA will always have the option to reject behavioural remedies in future mergers by pointing to the specific circumstances in Vodafone/Three. 

Nevertheless, the Vodafone/Three merger highlights the importance of making well-evidenced arguments, particularly with regards to efficiencies. The CMA noted that the companies’ joint network investment plan was credible, highlighting the importance of backing up any proposed efficiencies with strong evidence. 

Flint worked with CK Hutchison (owners of Three UK) on the Vodafone/Three merger, providing strategic and economic advice throughout the CMA process.