German, French telecoms join up to up ante in British mobile market

9th September 2009, Comments 0 comments

Deutsche Telekom has tried for months to find a partner for its troubled British unit, as it did not want to bear the costs of restructuring it alone.

London -- By joining forces in Britain, Deutsche Telekom and France Telecom hope to win a bigger share of a Europe's second biggest mobile phone market where no single operator now has more than a 30 percent share, analysts said on Tuesday.

Merging their British units would also check a bid by rival Vodafone to buy Deutsche Telekom's T-Mobile business and so gain the upper hand in the fiercely competitive market.

Deutsche Telekom and France Telecom will seek to combine T-Mobile UK and Orange UK in a jointly owned entity, Deutsche Telekom said on Tuesday.

With some 28.4 million clients, the new operator would have a 37 percent market share, ahead of 02, owned by Telefonica of Spain with 27.7 percent, and Vodafone with 24.7 percent.

The tie-up makes "simple business sense," said Ernest Doku, of mobile phone price comparison website

It "will give both companies a healthy market share and offer serious competition to O2 and Vodafone ... placing them in a strong position to drive contract prices down for consumers and offer unrivalled handset choice," Doku said.

Pro-forma combined revenues for T-Mobile UK and Orange UK together last year amounted to 7.7 billion pounds (9.4 billion euros, 13.5 billion dollars), with core earnings of around 1.7 billion pounds, Deutsche Telekom said.

The new company was expected to generate cost savings in excess of 3.5 billion pounds, it added.

Analysts said the deal and possible further consolidation might be positive.

"The deal may suit all parties," said Mark Priest, a trader with ETX Capital. "It stands a far greater chance of being approved by the regulators as the joint venture would account for only 36 percent of the market.”

"In addition, (fewer) players in the market will see greater opportunities for profit," Priest said, adding: "On a macro level, this is another sign that we may be moving into a period of sustained (merger and acquisition) activity as firms look to realise cost savings through consolidation."

Deutsche Telekom has tried for months to find a partner for its troubled British unit, as it did not want to bear the costs of restructuring it alone.

The parent group booked an impairment charge of 1.8 billion euros on T-Mobile UK in its first quarter and said all options were open.

Deutsche Telekom chief financial officer Timotheus Hoettges said a tie-up with Orange would give T-Mobile "a clear and strong future" in what "is undoubtedly one of the toughest and most competitive" mobile markets.

His France Telecom counterpart Gervais Pellissier said the deal anticipated a "long-awaited consolidation" among British mobile operators.

Increased competition may not be welcome news for Vodafone whose year to March 2009 earnings plummeted nearly 54 percent as it warned that the outlook remained "challenging" as a result of increased competition.

Analyst Martin Gutberlet with Gartner said the deal would not necessarily solve T-Mobile's problems, noting that "market share is not the key to making operations more profitable."

Ceri Stanaway, telecoms expert at consumer group Which? in Britain, cautioned about the impact and regulatory concerns.

"This merger will clearly have a huge impact on the mobile market, since it will form the biggest mobile operator in the UK and bring the number of networks down to just four," Stanaway said.

It "does raise concerns about consumer choice in the long run and there may also be an impact from a competition perspective on smaller networks," he added.

In early afternoon trade, Deutsche Telekom was up 1.7 percent, France Telecom gained 1.8 percent and Vodafone rose 2.6 percent in markets showing more modest gains overall.


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