A Deutsche Telekom merger with Orange is unlikely for many reasons

Rumours of corporate courtship between Deutsche Telekom and Orange have resurfaced by they seem as implausible as ever.

The bringer of the rumour this time is German publication Handelsblatt, which witters on for several paragraphs before getting to the point that DT CEO Timotheus Höttges is wargaming how a merger with French operator Orange would play out. Even allowing for the idiosyncrasies of Google Trnaslate, the piece seems to be thin on substance, but they presumably got the goss from somewhere so we thought we’d do a spot of war gaming of our own.

The first major impediment to such a deal would be ownership of the combined entity. You might think two former state monopolies from similar-sized countries might be roughly the same size, but that’s not the case. DT has a market cap of around €73 billion, while Orange is worth a mere €40 bil.

The last time this came up this was apparently the main deal breaker but surely shareholders should just get a stake in the combined entity in proportion to the market caps at time of deal. This would give DT shareholders roughly two thirds of the merged company and Orange one third. It’s presumably a lot more complicated than that, but it’s not immediately obvious to us why.

Then there’s the not inconsiderable matter of regulation. The European Commission isn’t a big fan of M&A because it reckons the consumer always ends up getting ripped off as a result. However in the case of telecoms this has tended to be focused on keeping at least four MNOs in each country. If the EC focuses solely on national considerations then the fact that two of the world’s largest operators merging has broader competition implications may be overlooked.

They’re not totally in the clear, however, as both have significant operations in Poland, Romania and Slovakia. They would presumably have to do that manoeuvre when they hand over a bunch of their combined assets in each country, which in turn would be made available for a new entrant to the market to ensure the magic MNO number is maintained.

But lastly, and most importantly, we have the resulting colour scheme. Unless you have an irrational love of 60s psychedelia, pink and orange have no business appearing on the same sheet of paper. If they chose to combine them, possibly in proportion with the respective market caps, we’d be left with some kind of smoked salmon abomination that would surely spell disaster for the resulting company. For this reason alone we can’t see the deal happening.

UPDATE – 10:00, 28/11/19: For what it’s worth we got the following statement from an Orange spokesperson. “There are no discussions on this topic and it is not a subject of reflection at Orange.”