fivehundred magazine > M&A Yearbook 2024 > Dialling in the deal – the inside track on the Vodafone/Three merger

Dialling in the deal – the inside track on the Vodafone/Three merger

The planned tie-up between Vodafone and Three UK stood out in last year’s stuttering M&A market. Here, Slaughter and May M&A partners Victoria MacDuff and Richard Hilton, lead counsel for Vodafone, tell Legal 500 London editor Cameron Purse all about the deal

Whatever metric you track, 2023 was a poor year for M&A. One bright spark amid the gloom was the proposed £15bn merger between Vodafone UK and Three UK, which was announced in summer 2023. If cleared by competition authorities, the deal will create the UK’s biggest mobile phone operator.

The transaction was one of the five largest announced UK M&A deals by value last year according to Dealogic data, seeing Vodafone and CK Hutchison – the Hong-Kong based owner of Three – announce their intention to combine both UK mobile arms.

The transaction has generated roles for firms including Slaughter and May, in the lead for Vodafone, and Linklaters, which is advising CK Hutchison and Three UK. Just over half of the combined group (51%) will be owned by Vodafone, with CK Hutchison retaining 49%. The network will have around 27 million customers.

This merger is set to create a new market leader in the UK. Can you walk us through the initial stage; how did this deal opportunity first arise and what were the strategic drivers behind pursuing it?

Victoria MacDuff: It’s a mammoth transaction. The market in the UK has been ripe for consolidation for a while and the telecoms sector has changed quite significantly over the last 10 to 15 years. As it stands, Vodafone and Three do not benefit from the same scale as others, and this deal will help them achieve that. These transactions always start as an idea, and then take some time to come to fruition. This particular one was in the making long before it was announced as a signed deal. There’s a lot of groundwork that has to happen, not to mention the important post-signing CMA process.

Richard Hilton: But as mammoth as the project is now, it all started with a conversation.

Considering all the various workstreams, what have been the most challenging aspects in managing a transaction of this scale and scope?

Victoria MacDuff: Each side has a number of advisers, but as lawyers we tend to find that the nitty gritty of the transactional work falls into our court. At its peak, we had 70 lawyers working on this deal full-time, with teams on the ground in Hong Kong and London. There was a lot of heavy lifting, and it was a real sprint to the end. The size and scale of Vodafone and Three made it more complex than most deals and the joint venture structure meant we needed to think about what this partnership would look like long-term. What’s the lifespan of this joint venture going to be? How’s it going to work in the meantime?

Richard Hilton: From a lawyer’s perspective, the stakes are much higher than in a more straightforward M&A deal. These are the documents that will govern the relationship for as long as it lasts.

Victoria MacDuff: It’s a complicated and unique endeavour. Joint ventures are different each time we do them and that’s one of the things that makes them so interesting. Every time you work on one, the terms are truly bespoke. Teams are used to pulling together in the trenches at the firm and that was much more acute here than it would be on an average deal. All the various workstreams – competition, tax, corporate, our team dealing with the provision of services for the joint venture in the future – came together. Nobody was siloed.

You have to work with your client to establish what’s truly important at every stage. What is most crucial at the outset can become second order as something new comes in. You’ve really got to nail the most important things and then focus on the next layer down to get to agreed documentation.

What are the priorities for a successful integration between the two companies?

Victoria MacDuff: From the beginning, they (Vodafone and CK Hutchison) did a really good job of establishing who the leadership team for the joint venture would be. Both businesses have huge numbers of employees. It’s important to establish what the combined business will look like as soon as possible. Ultimately, these are customer-facing companies and they need to demonstrate how this deal will benefit them. That has to be the priority. The joint venture agreement is a bit like a prenup. You’re having lots of difficult conversations as you’re entering something quite exciting, but the more robust these conversations are, the better prepared you’ll be as partners.

Richard Hilton: You have to make sure people are aligned on the boring stuff. How are decisions going to be made? How often will you meet? It’s all about mitigating the chance of misaligned expectations. To extend the metaphor, it’s not just about signing the prenup. It’s about establishing who’s going to be cooking and who’s going to be putting the bins out.

Did the deal terms evolve significantly? Can you share some of the points where you had to compromise?

Victoria MacDuff: It’s actually quite hard to put my finger on anything specific. In deals that go on for this long, there’s always a natural evolution of terms. But really, the key points of the structure of the joint venture, the financials – all of those core terms were pretty fixed. It was the next layer down which proved to be more of a moveable feast. There’s always compromise, but in a joint venture you have to remember that everything you want impacts you in reverse. It’s always mutual. In negotiations, a joint venture drives good behaviour. Being in a 51/49, you’re on a more even keel economically. That financial alignment certainly helps.

For more junior lawyers, what advice do you have on developing strong M&A skills and standing out in deal teams?

Victoria MacDuff: Absolutely focus on getting the basics right. Obviously that means different things at different levels but this is what will give you the confidence to stretch yourself and take on something harder. On a deal like this, where there are so many workstreams, it’s easy to become focused on your own tasks. My advice is to show interest in the project beyond your own remit. It makes it more exciting, more interesting, more rewarding, and you can learn loads. Not only about what other people are doing, but about where you might see yourself in the future. You can see what you like, what you don’t like, what does and doesn’t fit your personality.

And what advice do you have for coping with the pressure of a transaction like this?

Victoria MacDuff: It’s a large, complicated deal but it can be broken down into manageable parts. Lots of the smaller tasks, we’ve done multiple times. You don’t run a marathon without training. You’re always building. Think about it as lots of little steps coming together. This is not an everyday transaction. The very exceptional nature of a deal like this makes it a very strategic and important project to work on. Sometimes that does mean intensity.

Richard Hilton: It’s demanding but people want to be involved. People come to work here so they can do transactions like this. It’s great work, it’s exciting work, and they’re willing to get stuck in.

Earlier this year the CMA confirmed that it has referred the joint venture for an in-depth Phase Two investigation amid concerns that it may reduce competition in the UK market.