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Fears of Chinese influence prompt investigation into £15bn merger of Vodafone and Three

Li Ka-shing
Li Ka-shing, the owner of Three’s parent company CK Hutchison, has been accused of ‘collaboration’ with the Chinese state - Bobby Yip/REUTERS

Vodafone has said it is cooperating with a national security review into its planned £15bn merger with Chinese-owned rival Three.

The telecoms giant last year agreed to merge with Three in a deal that will create the UK’s largest mobile network with more than 27 million customers.

However, the tie-up has attracted scrutiny due to concerns that Three’s Hong Kong-based parent company CK Hutchison could be granted access to sensitive national infrastructure.

Asked if the Government was reviewing the deal under the National Security and Investment Act, Vodafone boss Margherita Della Valle said: “Yes absolutely, as with all similar deals we are engaged in the NSA process for the merger between Vodafone and Three.”

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Ms Della Valle said both companies had been subjected to “very strict protocol in terms of data protection law [and] telecoms security regulations” and that the review was progressing “as planned”.

She added: “I think it proves the rigorous protocols we are all under and constitutes a model that is applicable for different situations.”

Margherita Della Valle
Vodafone boss Margherita Della Valle says both companies had been subjected to ‘very strict protocol’ - Ed Robinson/Vodafone

China-sceptic MPs and union chiefs have raised concerns about the merger with Three due to Vodafone’s sensitive government contracts and network of subsea cables.

Li Ka-shing, the billionaire Hong Kong owner of CK Hutchison, has been accused by Unite of political “collaboration” with the Chinese state.

Both Vodafone and Three have rejected the concerns, arguing that CK Hutchison has been in the UK market for two decades.

In addition to Three, the conglomerate also owns the Port of Felixstowe, health and beauty chain Superdrug, the rolling stock leasing company Eversholt Rail, the electricity distribution infrastructure UK Power Networks and Northumbrian Water.

Ms Della Valle also pointed out that Vodafone will own 51pc of the joint venture, with plans to dilute the Chinese share over time, and will appoint the chief executive.

It comes less than two weeks after a separate government intervention into Vodafone on national security grounds.

Britain's Secretary of State for Digital Culture, Media and Sport Oliver Dowden
Deputy Prime Minister Oliver Dowden intervened in a separate case involving Vodafone just two weeks ago - John Sibley/REUTERS

Deputy Prime Minister Oliver Dowden ruled the company was at risk of “material influence” by the United Arab Emirates after its state-controlled telecoms operator e& became the largest shareholder in Vodafone with a 14.6pc stake.

Mr Dowden ordered Vodafone to establish a special committee to oversee any work that has a bearing on British security, while bosses will also have to keep officials informed about the partnership with e&.

The UK introduced sweeping new powers under the National Security and Investment Act amid heightened concerns about foreign takeovers of British assets, particularly in sensitive sectors such as telecoms.

Meanwhile, Vodafone’s merger with Three is also under scrutiny on competition grounds amid concerns the deal could push up prices for consumers.

The Competition and Markets Authority (CMA) has launched a phase one investigation into the merger as it seeks to examine whether it will lead to a “substantial lessening of competition”.

Vodafone has previously said the deal was subject to approval on both competition and national security grounds.

It came as Vodafone reported a rise in sales in the third quarter as bosses look to push through a turnaround plan to return the company to growth.

Organic service revenue rose 4.7pc in the third quarter to €9.4bn (£8bn) as the company enjoyed growth in most of its markets.

Xavier Niel
Vodafone last week rejected an offer from Xavier Niel’s Iliad Group to merge their Italian businesses - Marlene Awaad/Bloomberg

Revenues in Germany, its largest market, grew 0.3pc to €2.9bn. However, this was weaker than the 1.1pc growth posted in the previous quarter as Vodafone rolled out further price rises to 1m customers, sparking some customer losses.

UK revenues grew by more than 5pc as the company gained 18,000 mobile customers, while broadband customers grew by almost 40,000 to 1.3 million.

Vodafone also pointed to strong growth in its business division, while cloud and Internet of Things services grew by a fifth.

Ms Della Valle said: “We’ve made good strategic progress in the first nine months of the year, with improving customer satisfaction and three consecutive quarters of service revenue growth in Europe.”

Karen Egan, head of mobile at Enders Analysis, said the results were “strong on a headline level” but warned the figures were skewed by “erratic” growth in markets such as Italy and Egypt.

Aside from the Three merger, Vodafone is gearing up from a wave of deals across Europe as Ms Della Valle tries to simplify the group’s operations.

The company has inked a £5bn deal to sell its Spanish operations to Zegona Communications.

Last week, Vodafone rejected an offer from Xavier Niel’s Iliad Group to merge their Italian businesses. However, bosses have said talks are ongoing with other parties about a deal in Italy.