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UK mobile carrier Three could benefit from JV with Sky, Vodafone – analysts

Disruptive U.K. mobile carrier Three could pursue a joint venture with peers Sky Ltd. or Vodafone Group PLC, analysts told S&P Global Market Intelligence.

The CK Hutchison Holdings Ltd.-owned firm is "theoretically" open to mobile transactions similar to its attempted acquisition in 2016 of Telefónica UK Ltd. or O2, Three U.K. CEO Robert Finnegan told Bloomberg News on Aug. 26.

The Three-O2 deal was blocked by the European Commission on the grounds that a reduction in the number of mobile operators in a country from four to three would harm competition. The EC's decision was ultimately annulled by an EU court, but by then O2 had agreed to a joint venture with Liberty Global PLC's U.K. business Virgin Media.

The structure of a Three deal in the U.K. is also likely to be a joint venture rather than an acquisition, analysts said. Leading operator Vodafone and Comcast's Sky are unlikely to sell their mobile businesses but may be open to joining forces with Three, they said.

A partnership with Sky may be the most likely, Kester Mann, director of consumer and connectivity at tech analysis firm CCS Insight, said. The Comcast Corp. unit faces more of a direct threat from the joint venture between its chief competitor Virgin Media and its existing mobile network partner O2, he said. The deal also leaves Three as the last mobile-only provider in the U.K. amid a shift to high-speed broadband and mobile convergence.

Sky renewed its agreement to use Telefonica U.K.'s network for its virtual mobile operation in 2018. The company competes with Virgin on internet, pay TV and mobile services, while its mobile division reached 1 million customers in June 2019.

A joint venture between Sky and Three would be complimentary as there is little overlap between their businesses, giving them the chance to provide a compelling converged offering and opportunities to cross-sell to each other's customers, according to Phil Kendall, executive director of tech analysis firm Strategy Analytics' service provider group.

A partnership with Three would give Sky access to mobile assets, making its mobile proposition "more solid than an MVNO," Mann said.

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Both sides may have their reservations, however. Having found success in mobile, Sky may be reluctant to do a mobile deal unless it can own network infrastructure, said Mohammed Hamza, principal analyst at Kagan, a research offering of S&P Global Market Intelligence. Three may decide it is better off emulating Sky and Vodafone and lease out infrastructure from broadband network provider BT, Hamza said.

A partnership with Vodafone also has its strengths and weaknesses, the analysts said. Combining Three's base with Vodafone's 18 million U.K. mobile customers would "create a leading provider," Mann said.

Vodafone is struggling to find growth on the mobile side in comparison to O2 and BT Group-owned Everything Everywhere Ltd., Hamza said. While it has experienced broadband momentum in the U.K. with a 55.42% compound annual growth rate since 2016, its mobile CAGR is 0.18%, according to Kagan.

Both companies have also formed joint ventures. Three's Italian operation began as a joint venture and Vodafone currently has a 50/50 joint venture in the Netherlands with Liberty Global in the form of VodafoneZiggo. The Dutch telco is a recent bright spot for the two firms, gaining 58,000 mobile postpaid and 6,000 broadband customers in its fiscal second quarter, with revenue increasing 2% year over year — its fifth consecutive quarter of growth.

"We have long believed that a deal between Vodafone and Three is plausible," Mann said, adding "it could happen on a joint venture similar to the O2 and Virgin Media merger."

Such a deal with Vodafone could "arguably work," according to Kendall. But as the telco already competes with Three in Italy, "to go from direct rival to being a partner could be messy," he said.

Three U.K. had 9.5 million active customers in the first half of 2020, down from 10.2 million in the same period last year. The mobile network operator is parent CK Hutchison's second-largest European telco behind Italy's Wind Tre Italia SpA, which boasts 20.3 million customers. The Hong Kong-based conglomerate's regional telecom operations also include businesses in Sweden and Austria, with 3.6 million customers between them.