Vodafone shares lose ground on lack of merger news

The stock soared on Wednesday after news of a possible combination of its UK operations with CK Hutchison

A Vodafone-CK Hutchison merger would create the UK's largest mobile network, with 28 million customers. Reuters

Having gained 3 per cent on Wednesday, a lack of merger news took shares in British telecoms company Vodafone lower on Thursday.

Rumours that Vodafone was close to a deal that would merge its UK telecoms operations with those of the global conglomerate, CK Hutchison, sent the shares higher on Wednesday.

The two companies were set to announce the merger of their UK mobile operations, which on the Hutchison side is the Three group, as soon as Friday, Reuters reported.

But no news is bad news on share markets and the lack of confirmation on Thursday led to traders taking some profits, with the effect that Vodafone shares fell by 5 per cent in early trading in London, heading for their steepest one-day drop in three weeks.

Mobile behemoth

Any potential deal that emerges from the talks between the two companies, which have been going on for at least a year, would be worth somewhere in the region of £15 billion and would create the UK's largest mobile network with 28 million customers.

It is thought the new entity would be 51 per cent owned by Vodafone and would enable CK Hutchison to exit the UK mobile market altogether.

The UAE investment group e& has been steadily growing its stake in Vodafone for a year, and currently owns 14.6 per cent of the British company.

Smartphones display the Three and Vodafone apps on the Apple App Store. Bloomberg

It has been a long road for Vodafone and Hong Kong-based CK Hutchison, prolonged by the fact that the British mobile operator was searching for a chief executive at the same time.

But now that Vodafone's finance chief Margherita Della Valle has taken over the reins at the company, analysts see a deal as being announced very shortly.

“In the end, if there is a deal, then the terms of it [and potential read-through for implied valuations] will be interesting, as will any implications for Vodafone’s heavily-indebted balance sheet,” Russ Mould, investment director at AJ Bell told The National.

“Sceptics will argue that VOD looks like a highly-leveraged investment trust of telecoms assets, so any deal that cleans up the group structure and helps to reduce debt could be taken as a positive, especially by a share price that is languishing at levels last seen in late 1997, before the tech, media and telecoms bubble of 1998 to 2000 really got going.

“Any deal that leaves Vodafone with little improvement in its balance sheet and another stake in another business which it no longer fully controls might not be seen quite so positively, unless this transaction is a clear precursor of a bigger deal or wider changes to the portfolio of assets further down the road.”

Regulatory hurdles

However, analysts also expect a long and complicated battle to get any deal past the UK's competition authorities, because it would reduce the market to only three major players.

The Competition and Markets Authority (CMA) will keep a close eye on any deal, mindful of the fact that mobile operators in the UK have already increased their prices by 14 per cent so far this year.

A similar deal between the 3 group and O2 was blocked by the CMA back in 2016.