Franco-German alliance in battle of Britain

Deutsche Telekom and France Telecom are to build a super-network in the UK, after announcing plans to merge their respective mobile operations, T-Mobile UK and Orange UK, into a 50:50 joint venture.

If the deal is signed off by the competition authorities it will create a new market leader with over 33 million subscribers and a 43 per cent share of the market. This compares to current leader O2’s 22.44 million strong user base and 29 per cent market share. The new player will also benefit from the inclusion of Orange’s fixed broadband subscriber base.

Under the agreement, 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 “powered by” branding strategy.

But Abigail Browne, senior analyst at Informa Telecoms & Media, belives 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. “Removing one player from the market will also help alleviate the intense price competition that has ravaged the UK market, which will be to the benefit of all players.”

The big question now is how the enlarged entity will position itself in the market. Informa believes 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 nuts and bolts of the merger would see Deutsche Telekom contribute T-Mobile UK on a cashfree, debt-free basis, including T-Mobile’s 50 percent holding in its 3G network joint venture with Hutchison 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. Then Deutsche Telekom would grant a £625m loan to the joint venture, which would be used to simultaneously reimburse £625m to France Telecom. Ultimately, the joint venture would have indebtedness of £1.25bn, represented by two shareholder loans of £625m held by each of Deutsche Telekom and France Telecom.

The deal is expected to generate estimated 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 mobile sites and the streamlining of operations.

“The idea is to build a network that can support more than voice and text,” said Timotheus Höttges, CFO of Deutsche Telekom, “We want to build a strong network for 3G services.”

The board of the new company will have balanced representation from Deutsche Telekom and France Telecom, with a management team would be led by Tom Alexander, currently CEO of Orange UK, as CEO and Richard Moat, currently CEO of TMobile UK, as COO.