The two are the last remaining major domestic operators that have not yet embarked on consolidation in the country.
It has long been rumoured that the companies were engaged in talks behind the scenes, with neither side wanting to confirm those discussions.
However, this has now been confirmed by Vodafone, who said that a deal is being discussed which would see them owning 51% of the combined entity and CK Hutchinson, the owner of Three UK owning 49%.
Kester Mann, director of consumer and connectivity at CCS Insight said: “Confirmation of a potential tie-up between Vodafone and Three comes as no surprise - the two companies have made no secret of their interest to consolidate.
“The leading motivation to join forces is scale. In telecommunications, the most successful companies tend to be the largest; bulking up would offer many synergies and cost-saving opportunities.
“Under the status quo, it’s hard to see either operator growing enough organically to get close to challenging BT and Virgin Media O2 for size in the UK.”
Vodafone/Three: Vodafone said that a deal is being explored that would mean it owning 51% of the combined business and CK Hutchison owning 49%.
— Kester Mann (@kestermann) October 3, 2022
Mann adds that not so long ago, the tie up would have felt like an unnatural pairing, however, in recent times Vodafone has taken more of a challenger role in its home market, so the two operators’ strategies may no longer be too far apart.
He adds that regulation could be a major hurdle and it would be up to the competition authorities to decide whether reducing the number of players is a good move for the market.
“Advocates will argue it encourages investment; dissenters will claim it’s a reason to push up prices.”
“Of course, Vodafone pairing with Three is just one potential tie-up in the UK. Other deals involving Virgin Media O2, TalkTalk and Sky have been speculated in recent months.”
Paolo Pescatore, TMT analyst at PP Foresight adds: "It seems that progress is being made. Ultimately the number of mobile players will reduce, limiting consumer choice.
"Scale is key to help lower costs and improve margins. Convergence still remains the achilleas heel if this does get over the line.
Pescatore agrees that it certainly now makes sense for Three UK given its mobile-only position.
"If this were to happen, considering a move to integrate TalkTalk could strengthen their overall position.
"The company has a reasonable fixed line base and has now returned to offer TV services. Despite previous failed attempts, both need to do more to sway customers to sign up to both mobile and fixed services."
