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What will a Vodafone/Three merger mean for 5G in the UK?

The boss of Three has warned that the 5G market in the UK is currently “unsustainable”. A merger with Vodafone could be critical if both companies are to avoid being pushed out of the market by consolidated players.

  • Ofcom has warned some companies in the UK’s 5G market might not see a return on investment without consolidation.
  • As the 5G rollout gathers pace, Huawei will have to remove its equipment from the UK’s networks by 2027.
  • How to invest in communications stocks: First Trust Indxx NextG ETF offers exposure to stocks within communications and wireless telecommunication. It is up 10.32% in the past six months.

Fifth-generation mobile network coverage, or 5G, has been commercially available in the UK since 2019. After an initially slow deployment, the rollout has been picking up speed.

According to Ofcom, the communications regulator, the proportion of outdoor space in the UK, which receives 5G coverage from at least one mobile network, was 73%82% in January this year, up from 67%78% in September of last year. There were 12,000 deployments last year, approximately double the number in 2021, according to the regulator’s Connected Nations 2022 report.

The number of premises across the UK covered by all operators with 5G capabilities was 12%22% as of the end of January, a sharp rise on the previous figure of 1120%.

The UK government sees 5G as a transformational technology and has recognised the need to provide access to as many people as possible, as quickly as possible, to power the future digital economy. The Wireless Infrastructure Strategy is targeting bringing 5G standalone networks to all populated areas by 2030, as Opto detailed in May of this year.

 For this to happen, the 5G market needs to be fair. As it currently stands, there is a risk that some mobile network providers may be at a disadvantage: Ofcom previously named Vodafone [VOD.L] and CK Hutchison’s [0001.HK] UK network Three as sub-scale operators.

Vodafone/Three merger to challenge consolidated players

Vodafone and Three are on the verge of finally announcing their much-anticipated merger, which will give rise to the biggest mobile network operator in the UK. Vodafone will control 51% of the new entity, worth approximately £15bn, while Hutchison will own 49%, reported Reuters.

Vodafone announced the deal last year, saying it would help it and Three to “gain the necessary scale to be able to accelerate the rollout of full 5G in the UK and expand broadband connectivity to rural communities and small businesses”.

The merger would ultimately help both companies compete with the merged pairings of BT [BT-A.L] and EE and Virgin Media and Telefonica’s [TEF.C] O2.

“The merged business would challenge the two already consolidated players for all UK customers and bring benefits through competitively priced access to a third reliable, high quality and secure 5G network,” Vodafone argued in a regulatory filing published in October last year.

Merger could help raise Three’s return on 5G investment

Rolling out 5G networks can be a costly business, as Robert Finnegan, Three UK CEO, has found out.

In a statement issued alongside full-year results released back in March, Finnegan said that “returns continue to be below our cost of capital and EBITDA minus capex remains negative”.

The current market, where 5G investment is spread across four players, is “unsustainable”, Finnegan added, implying that the Vodafone merger was needed if Three is to survive.

The merger will no doubt attract scrutiny from the Competition and Markets Authority (CMA), however. In this regard, it is worth recalling that the European Commission blocked Three’s attempt to buy O2 from Telefonica back in 2016.

“Aside from creating a new mobile market leader, a combined Three–Vodafone would boast a significant proportion of 5G spectrum,” commented James Robinson, senior analyst at Assembly Research, last October. The CMA will have to decide whether the merger would result in Vodafone and Three having an unfair spectrum market share.

5G infrastructure rollout leads to bans

As the UK continues to invest in 5G technology, one company that won’t be part of the infrastructure is Huawei. The controversial Chinese firm must remove its gear from all UK 5G public networks by 2027. An immediate ban on new installations of Huawei equipment came into force at the end of last year.

In early June, the Financial Times reportedthat the EU is considering introducing a bloc-wide ban on Huawei. Back in 2020, EU member states were given permission to kick out any supplier of 5G equipment they deemed high risk, but only a third of the countries have done so.

On this, Michael Wessel, a commissioner on the US–China Economic and Security Review Commission, tweeted that EU “policymakers are ignoring the potential risks of the company's plans to dominate cloud infrastructure”. The US banned imports of equipment from Huawei and ZTE [0763.HK] last year.

AI to power future 5G infrastructure

With interest in artificial intelligence (AI) at a fever pitch, chipmaker Nvidia [NVDA] is teaming up with Softbank [9984.T] to create a telecoms network that will be able to host generative AI and 5G services.

According to Nvidia, 5G will push mobile network operators away from monthly voice, data and messaging bundles towards high-value services that will require and make use of edge computing. AI-powered applications will help mobile network operators to cope with increased demand and improve efficiency and performance for customers.

How to invest in esports stocks

ETFs, or exchange-traded funds, offer an economical and diversified way to invest in a variety of stocks within a particular theme.

Funds in focus: First Trust Indxx NextG ETF

Given that advanced chips will power future 5G applications, it’s no surprise that the semiconductor industry accounts for nearly 20% of the First Trust Indxx NextG ETF [NXTG]. Communications equipment and wireless telecommunication services account for 10.3% and 9.1%, respectively. The fund is up 10.25% in the past year and up 10.32% in the past six months.

The Defiance First 5G ETF [FIVG] doesn’t break its portfolio down by industry, but the fund offers exposure to US stocks involved in the development and rollout of 5G networks, including, but not limited to, mobile network operators, manufacturers of cellular equipment and cloud computing equipment, chipmakers, and even data centre REITs. The fund is down 5.2% in the past year but up 3.7% in the past six months.

The iShares Future Cloud 5G and Tech ETF [IDAT] is weighted overwhelmingly in favour of information technology (85.26%). Real estate (5.62%), financials (4.84%), materials (2.26%) and communication (1.75%) make up the rest of the portfolio. The fund is up 6.1% in the past year and 8.49% in the past six months.

Disclaimer Past performance is not a reliable indicator of future results.

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