Vodafone in merger talks with Hutchison's Three

The resulting company, following a successful merger, would have around 27 million mobile consumers in UK

Vodafone UK and Hutchison's Three are in negotiations about combining their respective businesses in order to create a market-leading mobile network in the UK.

CK Hutchison, the Hong Kong-based conglomerate, has been looking to sell Three UK for some time, after determining that the company is sub-scale in a market with high capital expenditure needs for building network infrastructure.

It appears that the company has come to the conclusion now that a partnership with Vodafone offers the greatest chance for it to contribute to market consolidation.

Three has nearly nine million users in the UK.

If Vodafone UK and Hutchison's Three, Britain's third and fourth biggest networks, respectively, agree to a merger deal, the resulting company would have around 27 million mobile consumers - more than the combined customer base of the two current market leaders, BT's EE and Virgin Media O2.

Under the terms of the proposed deal, Vodafone would own 51% of the company, while Hutchison would hold 49%. Rather than trading any cash for these holdings, the ownership would be divided by adjusting ownership of debts.

The discussions between the two parties have reportedly progressed to a more advanced level, and a possible deal is expected to be achieved by the end of the year. According to Sky News, the merger talks accelerated in recent weeks after a period in which they were thought to have completely stopped.

The UK's Competition and Markets Authority (CMA) would investigate any potential merger. In the past, regulators have resisted mergers that might result in fewer mobile networks in the UK.

However, a report from the communications watchdog Ofcom earlier this year said certain local carriers lacked the scale to cover their cost of capital. According to the findings of the analysis, both Vodafone and Three in recent years have generated returns on investments that are lower than the cost of the capital they have used.

"By combining our businesses, Vodafone UK and Three UK will gain the necessary scale to accelerate the rollout of full 5G in the UK and expand broadband connectivity to rural communities and small businesses," Vodafone UK said.

"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," it added.

Ofcom said that it did not have a fixed stance on the issue of market consolidation.

"Our view is that potential mergers in telecoms markets need to be assessed on a case-by-case basis, rather than on a presumptive view of the appropriate number of competitors," the watchdog said in its latest report.

A merger between Vodafone and Three is only one of several possible tie-ups in the UK.

Recently there have been rumours of other deals as well, involving Virgin Media O2, TalkTalk, and Sky.