CK Hutchison unit, Vodafone merger will have modest financial impact: S&P

The merger of Three UK and Vodafone could make it the largest telecom player in the UK.

The potential merger between the CK Hutchison Group Telecom Holdings’ subsidiary and Vodafone is expected to have a limited financial impact on the Hong Kong-based group, according to S&P Global Ratings.

If materialised, the merger of Three UK (3UK) and Vodafone brings together the third- and fourth-largest telecom players in terms of subscribers.

However, there are uncertainties surrounding the deal, including regulatory reviews and approval by the UK Competition and Market Authority.

The merger would swell the size of the combined operations, leading to significant operating efficiencies and cost savings. 

With a total of 27 million subscribers in the UK, the merged entity will have increased flexibility to optimise network infrastructure and various operating expenses.

The transaction involves Vodafone and CKHGT combining their UK telecom operations. CK Hutchison Holdings (CKHH) will have a 49% stake through CKHGT, while Vodafone will hold 51%. 

The deal is expected to be finalised in late 2024.

Financially, the transaction's impact is moderate. 3UK will repay a EU1.7b intercompany loan to CKHGT, which could balance out the loss of 3UK on the consolidated debt-to-EBITDA ratio for both CKHGT and CKHH. 

The leverage impact on CKHGT and CKHH is estimated to be modest, with a projected increase of 0.1x in their look-through leverage for 2024, pending further financial disclosures.

The merger may prompt a reassessment of CKHGT's business profile and its position within CKHH. 

The deal includes options for Vodafone to acquire CKHGT's stake and for CKHGT to sell its stake to Vodafone three years after the transaction's completion. 

These embedded options could result in CKHGT eventually exiting the UK telecommunication business.