Vodafone, VMO2 shuffle spectrum to woo watchdog amid merger moves

UK telcos Vodafone and Virgin Media O2 (VMO2) have struck a new network sharing agreement with a provision that seems aimed at smoothing the path for Vodafone's planned merger with Three.

VMO2 announced the updated mobile network sharing agreement, saying it significantly extends the existing agreement it has with Vodafone UK Limited for "more than a decade," bolstering mobile coverage across the country.

The agreement also includes a clause that VMO2 will acquire spectrum from the company created by the merger of Vodafone UK and Three UK (currently identified as "MergeCo") if it is waved through by the Competition and Markets Authority (CMA).

Vodafone and O2 (as was) signed their network sharing agreement 12 years ago, creating a joint venture called Cornerstone Telecommunications Infrastructure Limited (CTIL) that pools the radio mast infrastructure for both companies. The upshot is that customers of either company can get a service broadly covering most of the country.

Today's agreement extends that by more than a decade, but in response to queries from The Register, neither VMO2 nor Vodafone would detail exactly what period it covers.

However, this arrangement complicates the proposed Vodafone-Three merger, and telco giant BT – one of the two big mobile players in the UK mobile market after its acquisition of EE – has already voiced objections.

In a response to the CMA's ongoing investigation of the proposed coupling, BT said it was concerned that MergeCo would have "a disproportionate share of capacity and spectrum" in the country, and that this would harm competition.

As we reported at the time, Vodafone and Three are said to hold as much as 49 per cent of all licensed bands between them, while Three is also part of a network-sharing joint venture with EE called MBNL.

Thanks to these two sharing agreements, MergeCo would have access to both BT's and VMO2's strategic investment plans, which could give it a distinct advantage in competing against them, BT also warned.

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By agreeing to let VMO2 acquire spectrum from the newly created MergeCo, the hope is that this will assuage some of CMA's concerns over the Vodafone-Three deal.

"We believe that this new agreement addresses the issues we have voiced and the CMA outlined in its initial decision, and will now continue our engagement with the regulator in this spirit," VMO2 chief executive Lutz Schüler said in a statement.

A Vodafone spokesperson told us that the move would "balance up" the spectrum allocation between the three big mobile operators that would exist post-merger – BT/EE, VMO2, and MergeCo.

The spokesperson also said that Three would likely end its participation in the MBNL network sharing joint venture with EE, and instead join the CTIL arrangement.

"The CMA is worried because it doesn't want MergeCo in both sharing agreements," the spokesperson said.

Neither Vodafone nor VMO2 was willing to detail which spectrum would change hands as part of the deal, although VMO2 said: "You can assume it is spectrum we want and compatible with our existing holdings (midband in particular)."

Whether this new agreement is enough to mollify the CMA remains to be seen.

"This should not come as a huge surprise," said PP Foresight founder and telecoms analyst Paolo Pescatore. "The new network sharing deal builds upon the existing relationship and will extend to Three should the merger with Vodafone get the green light."

"Moving to divest spectrum is a key part to getting approvals and shows a willingness to provide concessions," Pescatore added. "However, the devil is in the detail given the current market spectrum position among players with Three UK having all of the 5 GHz. The regulators will want to see greater clarity on this."

When it comes to Three exiting the sharing agreement with EE, Pescatore said there would be technical issues to untangling all that.

"There will need to be some assurances to MBNL until Three most likely exits from the network sharing deal, to ensure a level playing field," he commented.

A Bloomberg Intelligence analyst claimed that the network sharing agreement and spectrum sale look "insufficient" to appease the CMA.

"Regulatory approval of similar deals across Europe required typically structural remedies that encouraged a new entrant," he stated.

VMO2 claimed that the combination of MergeCo's commitment to invest £11 billion in its network over the next decade and its own £2 billion annual investment in networks and services would ensure better mobile connectivity, choice and competition. ®