Mobile networks Three and Vodafone hope that a combination of their UK operations can help them compete with their rivals in the roll-out of 5G, they revealed on Monday.
The owners of the networks said they are in talks about a deal which would create a new major player in the UK mobile market.
“By combining our businesses, Vodafone UK and Three UK will gain the necessary scale to be able to accelerate the rollout of full 5G in the UK and expand broadband connectivity to rural communities and small businesses,” Vodafone said in an update to shareholders.
Vodafone would own 51% of the new business, and Three UK owner CK Hutchison would take the rest.
They hope their combined scale will help the two companies move out of a problematic situation where the returns on their investments are not enough to cover the costs.
It has made the companies less competitive with their peers – EE and Virgin Media O2 in particular.
“The conditions to ensure thriving competition in the market need to be nurtured, otherwise the UK is at risk of losing the opportunity to be a 5G leader,” Vodafone said in a statement.
They referred to a report from regulator Ofcom which found that both Vodafone and Three have in recent years delivered returns on investments that are lower than the cost of the capital they used.
“Vodafone and Three may not have covered their cost of capital.
“If ROCE (return on capital employed) was to fall, or was expected to fall, below the cost of capital for a sustained period of time for any MNO (mobile network operator), this could dampen its incentive to invest,” the report from February this year said.
Vodafone said: “As Ofcom has identified, some operators in the UK – Vodafone UK and Three UK – lack the necessary scale to earn their cost of capital.”
It added: “The merged business would challenge the two already consolidated players for all UK customers and bring benefits through competitively priced access to a third reliable, high quality and secure 5G network throughout the UK.”
As companies prepare to phase out their 3G network – Vodafone will do so in 2023 – 5G is being credited with potentially transformational abilities.
A report from Vodafone published in 2020 argued that the roll-out of 5G could bring more than £120 billion in productivity gains to the UK economy between 2025 and 2030.