Anyone who follows my blogs will know there is never a dull moment in telco and the headlines in the last month or so have only confirmed this. We’ve seen the O2 and Virgin deal and the CKH court ruling. Both stories that underscore the necessity to keep markets growing and how competitive and dynamic telco is.
But adding more colour to this vibrant backdrop were these two bombshells – news that BT is undervalued and having to protect its business, and Three’s CEO openly stating that it would be open to consolidation – a huge statement to make at any time but especially now.
I’ve long speculated that the O2 / Virgin Media merger would put Three at a disadvantage and trigger a bold move from them. So what are Three’s options and those of its competitors?
1.Buy fixed to remain relevant. Straightforward enough as Three could very feasibly target TalkTalk who gave up its mobile ambitions a few years back. History tells us that the regulators have shown they are less concerned about fixed and broadband mergers (see Vodafone and C&W, EE & BT as well as Virgin / O2).
But it seems TalkTalk might resist. It has turned down offers relatively recently and from the outside it looks like it’s in a good position to command a premium. Three’s pockets will have to be deep to win this one, but it’s a good gamble if they want to quickly acquire the elements missing from its portfolio.
2.How about Sky? Three, or rather its richer parent CKH, may consider an acquisition or a merger. It operates in a number of the same markets as Sky including Ireland, UK and Italy where it has merged with Wind.
My experience tells me that Sky is likely to be unhappy about the tabled O2 and Virgin deal as it poses strategic risk to its TV and broadband business. And it goes without saying that it may view continuing its wholesale relationship with O2 as a bit of a ‘limiting factor’, in the same way Virgin did when it initially announced a move from BT to Vodafone. Either way a takeover or merger brings elements to both parties. TV and broadband for Three, mobile network economics and 5G broadband from Three.
3.Would Vodafone pitch in? Interesting one. Vodafone UK has been pretty quiet on the acquisition front but globally it bought the European assets of Liberty Global in 2019. This is quite some acquisition with operations in Germany, the Czech Republic, Hungary, and Romania (CEE). It has a total enterprise value of €18.4 billion. As such, Vodafone becomes Europe’s leading converged operator with 54 million cable and fibre households ‘on-net’ and a total next-generation network reach of 124 million homes and businesses.
It means that almost half of Vodafone’s consumer European service revenues now come from growing fixed and converged services.
I’m sure Vodafone would want to grow more but would snapping up Three be the right move? In the past, Vodafone grew significantly in the UK through acquisition of service providers but its last big play was Cable and Wireless in 2012. Is that a sign it’s not interested in deals? Maybe, but don’t forget Hutch and Vodafone merged in Australia in 2009 under the watchful eye of Vodafone’s Group CEO Nick Read when he was Vodafone’s Regional CEO of Asia Pac.
The Three and Vodafone UK customer bases are pretty complementary, so actually coming out of merger hibernation could be a real possibility. Vodafone UK has been actively seeking new growth, even coming back into the wholesale market and briefly winning Virgin until the merger with O2 was announced. As I’ve said before that will have left a huge hole in the budget, closing it will be a necessity.
4.Can we expect anything from BT? This is the longest of long shots for me despite the current share price, which bounced on takeover speculation. I think there is more chance of activity from private equity or from its other major shareholder Deutsche Telekom to increase its stake and control. But in telecoms you just never know, I have been surprised, nay, shocked before!
5.And finally, here’s one from left field – What about Amazon? I speculated a long time ago that it may be in the frame for getting into telecoms. I think it could start circling overhead with a view to making a tactical swoop. Why? Well, it’s in discussions in India over a $2bn investment in telco. That’s not peanuts and it’s a market that has plenty to offer. That said the UK market now has a lot to offer too. So it’s certainly a possibility, and although I question whether Three has the scale to appeal to Amazon, it would be a pocket change acquisition for a company that regularly buys or invests in a range of different companies.
Five options then, and as you can see I can’t settle on just one to back. As ever the market is way too unpredictable for that. But I think the shorter odd bets will be on TalkTalk and Sky with a good outsider being Vodafone. Whatever happens it’s going to be exciting and there will be plenty more rolls of the dice.
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