Possible Vodafone merger of UK operation with Chinese rival raises security concerns

Telecoms company has confirmed it is in talks with Hong Kong-owned rival Three UK

A branded sign is displayed on a Vodafone store in London. Reuters

Vodafone is in talks over a possible merger with Hong Kong-owned rival Three UK, sparking security concerns over sensitive underwater cables.

FTSE 100 company Vodafone confirmed on Monday it is speaking with Three about joining forces, potentially leading to the construction of a telecoms empire with 27 million customers.

But experts say the deal could raise red flags under the UK's National Security and Investment Act.

The act gives the government “powers to scrutinise and intervene in business transactions, such as takeovers, to protect national security, while providing businesses and investors with the certainty and transparency they need to do business in the UK”.

The legislation has so far been used to block a Chinese takeover of a Bristol computer chip design company, among other deals.

Reports say Vodafone UK is deemed “particularly sensitive” by security sources. That includes the former Cable & Wireless undersea cables it has owned since 2012, considered to be a possible target for “hostile state eavesdropping” or even sabotage.

It also has interests in networks overseas.

Authorities will also investigate whether reducing the number of companies operating in the telecoms space from four to three would lead to increased prices due to reduced competition.

It is reported that no money will change hands as part of the deal. The companies will instead look to seek larger profits from both businesses by cutting costs.

Vodafone said it will retain control with a 51 per cent stake in the merged company.

Sir Iain Duncan Smith, who has led Conservative calls for a more hawkish approach to China, told The Daily Telegraph “the government must call this in”.

“These plans have clear implications for Chinese access to sensitive UK data and the business secretary must intervene,” he said.