The proposed merger of telecoms giants Vodafone and Three could lead to higher bills for tens of millions of consumers, the competition watchdog has warned.

An in-depth investigation by the Competition and Markets Authority (CMA) has provisionally found competition concerns over the £15 billion deal, which was first announced last summer. The probe provisionally found the merger may lead to prices rising for tens of millions of people or result in customers receiving a reduced service, such as smaller data packages in their contracts.

However, Vodafone and Three UK hit back and declared that they did not agree with the watchdog's findings, and emphasised that the provisional view was not a final decision.

The companies insisted the merger is "pro-growth, pro-customer, and pro-competition" and should be approved.

The CMA said its probe raised particular concern that higher bills or reduced services arising from the deal would negatively affect customers who are least able to afford mobile services, as well as people who might have to pay more for improvements in network quality they do not value.

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The CMA has also provisionally found the merger would negatively impact “wholesale” telecoms customers – mobile virtual network operators (MVNOs) such as Lyca Mobile, Sky Mobile and Lebara – which rely on the existing network operators to provide their own mobile services.

The merger would reduce the number of network operators from four to three, making it more difficult for MVNOs to secure competitive terms, restricting their ability to offer the best deals to retail customers, the watchdog concluded.

The CMA did find that the merger, by integrating the Vodafone and Three networks, could improve the quality of mobile networks and bring forward the deployment of next generation 5G networks and services, as claimed by Vodafone and Three. But it considers that these claims are overstated, and that the merged firm would not necessarily have the incentive to follow through on its proposed investment programme after the merger.

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The CMA said it will now consult on its provisional findings. It will also consult on potential solutions to its competition concerns, including the options set out in its remedies notice, including legally binding investment commitments overseen by the sector regulator, and measures to protect both retail customers and customers in the wholesale market. The CMA added that will retain the option to prohibit the merger should it conclude that other remedy options will not address its competition concerns effectively.

Stuart McIntosh, chair of the inquiry group leading the investigation, said: “We’ve taken a thorough, considered approach to investigating this merger, weighing up the investment the companies say they will make in enhancing network quality and boosting 5G connectivity against the significant costs to customers and rival virtual networks.

“We will now consider how Vodafone and Three might address our concerns about the likely impact of the merger on retail and wholesale customers while securing the potential longer-term benefits of the merger, including by guaranteeing future network investments.”

Vodafone's chief executive Margherita Della Valle said: "Our merger is a catalyst for change. It's time to take off the handbrake on the country's connectivity and build the world-class infrastructure the country deserves. We are offering a self-funded plan to propel economic growth and address the UK's digital divide.

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"Great network connectivity is a critical enabler of so many elements of our daily life and is central to the future prospects of so many sectors. Businesses large and small are dependent on it and it enables new industries - like AI - to thrive. It facilitates a step change in productivity and care across the public sector, and it lies at the heart of every nation's future prosperity."

Three UK chief executive Robert Finnegan said: "The current UK four-player mobile market is dysfunctional and lacks quality competition with two strong players and two weak players.

"This is reflected in the current state of the UK's digital infrastructure that everyone agrees falls well short of what the country needs and deserve."

Vodafone and Three stressed it was not a final decision and they plan on working with the CMA to reassure it of their plans and secure approval.

The CMA has invited responses to its provisional findings by October 4 and its notice of possible remedies by September 27. Its final report is due by December 7.