The British mobile phone landscape was today set for huge upheaval after the owner of T-Mobile said it wants to merge with Orange.
Deutsche Telekom, which was known to be considering selling T-Mobile outright, confirmed the exclusive talks between the two telecoms groups this morning.
Deutsche Telekom and France Telecom, which owns Orange, said they want create a new market leader in Britain, one of Europe's toughest markets, which will leapfrog its two main UK rivals Vodafone and Telefónica's O2.
A future with Orange would push Telefónica’s O2 off the top spot, with 37 per cent of the UK mobile market and a combined 28.4 million customers, excluding those of Virgin Mobile, which uses T-Mobile’s network.
In joint a statement, the companies said that both the T-Mobile and Orange brands will remain on the high street for 18 months after the deal is completed.
The companies said that during that period, they will review their “branding alternative”.
Analysts believe this is likely to mean scrapping one of the two brands in favour of the other. Orange is generally seen as the stronger brand in the UK.
As part of the 50:50 deal, Deutsche Telekom and France Telecom will each loan the venture £625 million, so that it will have total debt from its creation of £1.25 billion.
The companies also said today that by cutting overlapping operations, they can generate cost savings of £3.5 billion. Orange employs 13,000 staff in the UK and T-Mobile has 6,500 UK workers.
Cost savings will be generated by shutting down offices, decommissioning mobile masts, closing some retail stores and removing duplicated jobs in core support functions such as call centres.
Today’s deal is likely to be widely criticised by analysts and by Vodafone and Telefónica as a messy solution and it will need approval by competition regulators.
Telefónica and Vodafone had both tabled offers of about £3.5 billion for T-Mobile UK but the bids fell below the expectations of René Obermann, Deutsche Telekom’s chief executive.
Vodafone declined to comment. Telefónica was unavailable for comment.
A sale at £3.5 billion would have forced Deutsche Telekom to make another write-down on the division.
The group took a £1.6 billion hit on the business in May as it lost customers to rivals and its margins declined.
Deutsche Telekom wrote down the value of T-Mobile at that time to £4.5 billion, which included £1.2 billion of debt.
Tom Alexander, currently chief executive of Orange UK will become chief of the combined business while his opposite number at T-Mobile, Richard Moat, will be chief operating officer. The board of the venture will have "balanced representation" from Deutsche Telekom and France Telecom.
Timotheus Höttges, finance director of Deutsche Telekom, said: "In the second-biggest market in Europe, which is undoubtedly one of the toughest and most competitive, we are giving T-Mobile UK a clear and strong future.
“And, with our partnership, we have taken the most value enhancing strategy for Deutsche Telekom and its shareholders.”
Gervais Pellissier, finance director of France Telecom said: “By combining our operations in the UK, we anticipate the long-awaited consolidation in one of Europe’s most competitive markets, thereby creating a well positioned player.
Achieving savings will cost the venture £600 million to £800 million from 2010 to 2014. It also believes it will save £620 million in that period on capital expenditure by jointly expanding 3G coverage.
The deal is expected to be agreed by the two parties by the end of October, after due diligence is completed, and although it requires the approval of the supervisory board of Deutsche Telekom, the pair are not saying whether they will put the deal to their shareholders.
News Source: http://business.timesonline.co.uk/tol/business/industry_sectors/telecoms/article6825630.ece