Months of speculation about consolidation in the UK mobile market finally came to an end in early September when European carriers France Telecom and Deutsche Telecom announced a merger of their UK mobile businesses, T-Mobile and Orange.
Expectations about consolidation in the UK carrier market this year have largely revolved around the acquisition of struggling T-Mobile by one of its competitors. But the deal announced last month is to be conducted as a merger of equals, with T-Mobile and Orange folded into a 50:50 joint venture. This move would create a new market leader, with over 33 million subscribers and a 43 per cent share of the UK market. This represents a 50 per cent leap from current leader O2’s 22.44 million strong user base and 29 per cent market share, according to the latest figures from Informa Telecoms & Media’s WCIS. The new player will also benefit from the inclusion of Orange’s fixed broadband subscriber base and the potential to deliver converged services.
The nuts and bolts of the merger will see Deutsche Telekom contribute T-Mobile UK on a cash-free, debt-free basis, including T-Mobile’s 50 per cent holding in its 3G network joint venture with Hutchison (Mobile Broadband Network Ltd) and gross tax losses carried forward of at least £1.5bn. France Telecom would contribute the whole of Orange UK including £1.25bn of intra-group net debt. Deutsche Telekom would then grant a £625m loan to the joint venture, which would be used to simultaneously reimburse £625—or half of the FT debt—to France Telecom. This would leave the joint venture with the same amount of debt, £1.25bn, but with that debt spread evenly between the two parents.
The merger is expected to generate synergies in excess of €4bn, with estimated opex-based synergies reaching an annual run rate of over £445m from 2014 onwards, through saving in network and IT expenditure, marketing and distribution. The joint venture would also be expected to invest £600m to £800m in integration costs over the period from 2010 to 2014, related to the decommissioning of some mobile sites and the streamlining of operations.
The board of the new company will have balanced representation from Deutsche Telekom and France Telecom, with a management team led by Tom Alexander, currently chief executive of Orange UK, as CEO and Richard Moat, currently chief executive of T-Mobile UK, as COO.
The big question now is how the enlarged entity will position itself in the market. The success of an enlarged T-Mobile/Orange is by no means guaranteed, given the strength of the Vodafone and O2 brands and the potentially conflicting strategies France Telecom and Deutsche Telekom may have for the UK operation. The carriers said that the T-Mobile UK and Orange UK brands will be maintained separately for 18 months after completion of the transaction, during which time the companies will mull over a new brand to be introduced in the UK, hinting at a the ultimate introduction of a “powered by” branding strategy.
Abigail Browne, senior analyst at Informa Telecoms & Media, believes that while the scale of the joint venture would give the new entity strong purchasing power, the deal is actually good news for competitors Vodafone and O2, despite their own respective bids for T-Mobile UK being rejected. “Vodafone and O2 will both benefit from a reduction in competition, and be able to assert their own brands over the next 18 months while the joint venture focuses on internal integration,” said Browne.
Any improvement in purchasing power would need to be measured against the buying muscle available to Teléfonica (which owns O2) and Vodafone internationally, though. France Telecom and Deutsche Telekom’s entire mobile portfolios combined would still fail to match the grunt of Vodafone, and Teléfonica sits comfortably ahead of both its French and German rivals.
John Delaney, research director for European consumer mobile at analyst IDC warned that the integration is no mean feat. “A new brand could succeed but is risky and would incur heavy short-term marketing costs. And will the new operator retain Orange’s heavy emphasis on multimedia content/services and handset branding, or will it adopt T-Mobile’s more telecoms-centric marketing approach? What about T-Mobile’s strong focus on wholesale business? These questions, and many more, are doubtless already the subject of vigorous discussion between the two executive teams,” Delaney said.
Meanwhile, the deal could bring the prospect of a single network market closer to reality in the UK. While Orange and T-Mobile will have the opportunity to combine their 23,000 or so 2G base station sites as part of their merger, any attempts to consolidate their 3G networks will bring Hutchison’s 3UK into the equation. Through Mobile Broadband Network Ltd, formed by 3 and T-Mobile UK in 2007, the two firms share their masts and 3G access networks. MBNL was given the aim of making 13,000 combined base station deployments, with around 7,000 currently in operation. According to Richard Moat, the marriage of Orange and T-Mobile would bring another 7,000 3G sites to the table.
Moat said that 3UK is supportive of the proposed merger between T-Mobile and Orange, and is expected to want to share in the synergies afforded by the agreement. It should be noted that Orange UK already hosts 3’s 2G traffic and, in a statement released shortly after the merger announcement, 3UK said: “Our network infrastructure joint venture with T-Mobile inevitably makes us an interested party.”
Any move to bring 3 into the deal could be good news for Swedish kit vendor Ericsson, which dominates the managed service market in the UK mobile sector. MBNL is already operated and maintained by Ericsson and the Swedish firm also provides maintenance and operations for Vodafone UK’s 2G and 3G radio access networks as well as field maintenance services for radio and switch sites to O2. In fact Orange is the odd man out, after tapping Nokia Siemens Networks in March 2009 to manage, plan, expand, optimise and provide maintenance services for the Orange UK 2G/3G mobile network for the next five years. When asked about the NSN contract, an Orange spokesman said, “Many suppliers will be affected by the deal, but it’s early days yet and we will be in discussions with NSN over the coming weeks.”
If successful, the deal could herald further consolidation in the UK. With under five million customers, 3UK will find the going tough in a market where its nearest competitor has 17 million.