Taking a dip: UK mobile market in Q2 2024

If the Vodafone/Three merger is blocked we envisage a significant cost reduction push from Vodafone, with a highly uncertain path to acceptable returns.

H3G's capex would need to more than halve from 2022 levels to get its finances onto anything like a reasonable footing. A commensurate scale-back of its network, and commercial, ambitions would also be required.

With H3G likely to enact a slow walk from the UK under such a scenario via a hybrid MNO/MVNO strategy, the UK would end up with three nationwide mobile networks either way, just lower quality ones if the deal is blocked—with a real cost to consumers and the government's growth agenda.

Q1 was always going to be tough for Vodafone with lower in-contract price increases a very significant drag on performance (across the sector), TV losses in Germany ramping up, and ongoing struggles to turn around broadband performance there. A deterioration in German mobile is an unwelcome addition.

Encouragingly, Vodafone continues to optimise its portfolio and is guiding to a U-shaped recovery, with Q2 particularly weak and B2B driving a better 2H.

While there are particular headwinds this year and tailwinds next which point to an improving outlook, better operational performance remains critical to the company's future, and we continue to await evidence of this.

BT’s revenue growth in Q1 was hit by lower price increases, but positive EBITDA growth was achieved thanks to strong cost control as inflationary pressures abate.

Subscriber figures were decidedly mixed, with mobile much improved, retail broadband much the same in a difficult market, and Openreach broadband much worse (but still manageable in context).

The bigger picture is that BT is successfully keeping all metrics roughly stable as it completes its fibre roll-out and waits for the inevitable cashflow turnaround as a result.

VMO2 survived the hammer blow of lower inflation-linked mobile price increases in Q2 with substantially unchanged revenue and EBITDA growth, helped by improving broadband ARPU

However, both mobile contract and broadband subs suffered declines, likely driven by issues with serving existing customers as well as attracting new ones, and these trends have to improve for the company to return to top and bottom line growth

Guidance implies that EBITDA growth will worsen in H2, but this would be good news in our view if it is driven by expenditure to support improved subscriber growth across broadband and mobile 

Handset sales by UK mobile operators have been weak for some time as customers keep their phones for longer due to affordability issues, slowing technological advances, and the spread of longer handset contracts.

Though margins on handset sales are often slim, their erratic nature can lead to big EBITDA hits—we estimate that the recent 20% declines at VMO2 and Vodafone have had a 6-9ppt impact on EBITDA.

The operators have an opportunity to improve their fortunes in the refurbished handset market where take-up is low, but both consumer interest and margin potential is high.

Vodafone/H3G/VMO2 have announced a spectrum-trading and towers-sharing deal, allaying potential spectrum concerns around the proposed Vodafone/H3G merger, although BT may argue that it is short of some critical spectrum bands.

The towers sharing agreement incorporates H3G spectrum into the VMO2/Vodafone Beacon agreement and appears to expand the agreement onto some of H3G's current sites.

We estimate a c.70% increase in VMO2 capacity from this deal and 5% for the industry as a whole (in addition to the 25% from the Vodafone/Three merger). BT/EE made a strong argument for spectrum reallocation in its merger objection, and some validity to that argument may or may not remain post-trade