MOBILE phone giants Vodafone and Three are holding talks over a merger of their UK operations in a move to help them compete with rivals in the roll-out of 5G.

But analysts have warned the potential deal could raise competition concerns.

Vodafone has told the City today that it is in discussions with Hong Kong-based CK Hutchison Holdings Limited in relation to a possible combination of Vodafone UK and Three UK.

It declared in a statement that a combination would give the companies the “necessary scale to be able to accelerate the roll-out of full 5G in the UK and expand broadband connectivity to rural communities and small businesses.”

“The merged business would challenge the two already consolidated players (EE, owned by BT, and Virgin Media O2) for all UK customers and bring benefits through competitively priced access to a third reliable, high quality, and secure 5G network throughout the UK,” the statement added.

“There can be no certainty that any transaction between the two companies will ultimately be agreed.”

Vodafone would own 51 per cent of the combined entity, with CK Hutchison holding 49%, the statement said.

Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, said the response to the deal in the City has been "lukewarm", with shares in Vodafone "up 1.6% by lunchtine but down 3.8% on a five-day view".

Ms Streeter said: "This may be due to the significant regulatory hurdles ahead for the deal, as the authorities weigh up the potential ceding ownership of more core UK infrastructure to an overseas owner, but also perhaps the terms, with some analysis suggesting that Vodafone’s market share is almost double that of Three’s.

"This development follows a defined trend of mega mergers in the sector with only four major operators still remaining."

Analyst Kester Mann, director of consumer and connectivity at CCS Insight, said: “Confirmation of a potential tie-up between Vodafone and Three comes as no surprise - the two companies have made no secret of their interest to consolidate.

“The leading motivation to join forces is scale. In telecommunications, the most successful companies tend to be the largest; bulking up would offer many synergies and cost-saving opportunities. Under the status quo, it’s hard to see either operator growing enough organically to get close to challenging BT and Virgin Media O2 for size in the UK.

“Not so long ago, a tie-up between Vodafone and Three would have felt like an unnatural pairing. But in recent times, Vodafone has taken on more of a challenger role in its home market, so the two operators’ strategies may no longer be too far apart. 

“Should any deal materialise, regulation would be a major hurdle. It would be up to the competition authorities to decide whether reducing the number of players is for the overall good of the market. Advocates will argue it encourages investment; dissenters will claim it’s a reason to push up prices.”

Shares in Vodafone were up more than 2.5 per cent at 103.68p at around 1pm today.

“Of course, Vodafone pairing with Three is just one potential tie-up in the UK. Other deals involving Virgin Media O2, TalkTalk and Sky have been speculated in recent months.”