IHS Global Insight Perspective | |
Significance | The new joint venture would see T-Mobile UK and Orange grab a 37% share of the market—a good 10% ahead of closest rival O2, and representing a powerful new force in U.K. telecoms. |
Implications | Orange and T-Mobile say they expect cost savings of 4 billion euro (US$5.73 billion) from the joint venture (JV)—which will inevitably mean job losses at both operators. |
Outlook | As operators struggle with increasing levels of competition and regulation in Europe's saturated markets, IHS Global Insight expects to see further examples of operator consolidation emerge, before global financial markets recover. |
Deutsche Telekom has announced it has entered into exclusive talks with France Telecom, aimed at combining its T-Mobile UK unit into a 50:50 joint venture (JV) with France Telecom's Orange UK. The move would see the creation of the U.K.'s largest mobile operator, holding an estimated 37% share of the market, with some 28.4 million customers based on figures from the end of December 2008 (not including the Virgin Mobile MVNO carried on the T-Mobile network).
The announcement follows a weekend of increasingly frantic speculation concerning the future of T-Mobile UK, with all three of the United Kingdom's top mobile operators, Telefónica's O2, Vodafone, and Orange all touted as having tabled an offer for the unit (see United Kingdom: 7 September 2009: Vodafone and O2 Make Low Bids for T-Mobile U.K., Joint Venture Considered). However, there has been no official confirmation of any bids, and T-Mobile and Orange have issued a joint statement confirming the terms of the proposed JV. The signing of a deal is expected at the end of next month, subject to approval by antitrust authorities.
According to the joint statement, Deutsche Telekom will contribute T-Mobile UK to the merged firm "on a cash-free, debt-free basis", while France Telecom would contribute Orange UK, including £1.25 billion (US$2.05 billion) of intra-group net debt, "in order to equalise the value of the contributions to the joint venture". Once the deal closes, Deutsche Telekom would grant a £625-million shareholder loan to the JV, which would be used to reimburse £625 million to France Telecom. The joint venture would have total debt of £1.25 billion, represented by shareholder loans of £625 million each held by Deutsche Telekom and France Telecom.
The companies say the T-Mobile UK and Orange UK brands will be maintained separately for 18 months after completion of the transaction. During that period, the operators will review branding alternatives for the JV and will develop any strategy recommendations to be put forward for shareholder approval.
Outlook and Implications
A New Force in U.K. Telecoms. The joint statement from Deutsche Telekom and France Telecom has stated that the deal is expected to create substantial value for both customers and shareholders, and will create a new force in the U.K. mobile market, with annual revenues of almost 10 billion euro (US$14.3 billion). Since its launch, T-Mobile has only managed to retain around 12 million mobile customers in the United Kingdom, as well as carrying the calls for around five million lower value Virgin Mobile customers. It has struggled to compete against its larger rivals—and last month the operator admitted it had lost 87,000 customers in the second quarter of the current year. Orange has also seen some of the effects of an increase in competition fuelled by the recession, which has led to all U.K. operators undercutting each other, in turn producing a squeeze on revenues (see United Kingdom: 10 August 2009: T-Mobile Confirms Offering iPhones to High-End Customers). However, France Telecom's Orange has almost 17 million customers in the United Kingdom, including one million fixed broadband customers. The current U.K. market leaader is Telefónica's O2, which holds around a 27% share of the market—which the new JV is expected to leapfrog by at least 10%.
Has T-Mobile Finally Found a Solution? Owner Deutsche Telekom issued a profit warning in April, after booking a 1.8-billion euro impairment charge in its first quarter, partly on its weak U.K. performance. At that stage it was said that all options were open for T-Mobile UK—prompting months of speculation that the unit would be sold off. However, rumours of low offers from Vodafone and Telefónica seemed to undervalue the unit. Despite being in a buyer-friendly market, Deutsche Telekom was not desperate to sell—certainly not for a fire-sale price. Orange and T-Mobile say they expect cost savings of four billion euro from the JV—which will inevitably mean job losses at both operators.
Will There be Regulatory Intervention? The deal needs to be approved by the U.K. mobile regulator, Ofcom, which has praised the level of competition in the country's mobile market, saying recently that this represented a success for customers due to the number of operators. While there was some speculation that any effort by Vodafone or O2 to buy T-Mobile UK would fall foul of regulatory intervention, as this would give any resulting company an over 40% share of the market, it is less likely that Ofcom will step in where this JV is concerned, as the market share is less than 40%, and it does not involve either of the "big two" operators.
Fresh Consolidation in the U.K. Market: The deal will represent a significant consolidation in the U.K. mobile market, where operators continue to struggle with some of the toughest competition in the world. This consolidation may represent an ongoing trend, which has begun in the telecoms equipment sector with the break-up of Nortel, and continued in the United Kingdom with the acquisition of Tiscali's fixed-line interests by Carphone Warehouse for £236 million (see United Kingdom: 7 July 2009: Carphone Completes Tiscali Takeover). As operators struggle with increasing levels of competition and regulation in Europe's saturated markets, IHS Global Insight expects to see further examples of operator consolidation emerge, before the global financial markets recover.