Vodafone in advanced talks with Hutchison's Three UK over possible merger

Vodafone merger talks lead to bounce in share price

Merger talks between Vodafone Group PLC and the owner of Three UK, CK Hutchison Holdings Ltd - 1 HK, have intensified with insiders hopeful an agreement to combine their British operations will be reached before year end. It would make the new entity the mobile phone industry's biggest player by customer numbers.

The Hong Kong-based conglomerate, CK Hutchinson, has been looking at a sale of Three UK for some time as it sees the company as sub-scale due to the huge capital investment requirements for developing network infrastructure which the sector entails.
A deal with Vodafone represents CK Hutchinson’s best opportunity to stay relevant while benefitting from economies of scale, especially at a time when Vodafone chief executive, Nick Read, is under pressure from shareholders to revive its flagging share price which despite Monday’s rise of 2% due to the takeover talks trades at a 10% discount year-to-date.

Despite the advanced discussions taking place between the two parties, several significant hurdles still need to be dealt with, any of which may scupper a potential merger.

There is likely to be close regulatory scrutiny by the likes of Ofcom, the UK’s telecoms industry regulator, and the Competition and Markets Authority, especially since the combined group would control 46% of all UK mobile spectrum.
A deal would create a market-leading business, with roughly 27 million customers - with over 9 million coming from Three - and trump the UK’s current largest mobile phone network providers Virgin Media O2 and EE whilst reducing the number of UK providers from the current four to three.

Industry analysts expect CK Hutchison to seek a valuation for Three UK of roughly £6bn, which would lead to a combined Vodafone-Three UK valuation in the region of £12bn to £15bn.

Where to next for Vodafone shares?

Vodafone’s share price dipped to a 2 ½ year low at 99.6 pence, to levels last seen in March 2020 when the company’s shares slid to 92.76p, before Monday morning’s news of advanced merger talks with CK Hutchison, the Hong Kong-based conglomerate, taking place.

The daily candle stick is in the process of forming a Bullish Engulfing pattern, when a day’s open-to-close distance “engulfs” that of the previous day. It will be confirmed if the Vodafone share closes above Friday’s close at 101.20p on Monday. If so, a bullish reversal pattern will be formed which is likely to send Vodafone shares back towards the minor psychological 110p mark, around which it faltered between 20 and 26 September.

For a more lasting bullish reversal to be witnessed, a rise and daily chart close above the May low and mid-September high at 112.72p to 115.02p would need to be seen.

Minor support sits between the minor psychological 100p level and Monday’s intraday low at 99.6p with more significant support being spotted at the Covid-19 pandemic low at 92.76p.