Orange Move for T-Mobile U.K. Rebuffed By Deutsche Telekom—Report

France Telecom's Orange has made a bid for T-Mobile's U.K. business, which owner Deutsche Telekom refused, according to reports in the Guardian. The U.K. daily reports Orange made the approach following speculation Deutsche Telekom may be seeking to offload the struggling unit, following disappointing annual results from the German giant.

The report also suggests Vodafone approached Deutsche Telekom concerning a possible exchange for Vodafone's Turkish operations for T-Mobile U.K., although this rumour has been denied by sources close to Vodafone.

The news comes as new T-Mobile U.K. chief executive Richard Moat prepares to take over this week, and is expected to launch a restructuring of the business to turn around its flagging fortunes, which is likely to mean cost-cutting and possible further job cuts.

Outlook and Implications

• T-Mobile U.K.: Will it Stay or Will it Go? At the start of May, following another disappointing year for T-Mobile U.K., reports were suggesting that Deutsche Telekom's two main shareholders, the German government and private-equity firm Blackstone, which control 32% and 4.5% of the stock respectively, were raising questions over the future of the U.K. mobile unit (see United Kingdom: 1 May 2009: Deutsche Telekom to Merge Domestic Fixed and Mobile Units; Pressed to Sell T-Mobile UK—Report). The question of exiting the U.K. market first came to light at the end of 2008, but a sharp drop in the estimated value of the unit as the global financial crisis worsened soon made this option less attractive. Further rumours suggested that the shareholders would consider merging with or buying out a U.K. competitor, to improve T-Mobile U.K.'s performance by boosting its market share, but it is less-clear which operator was being considered for such a deal. T-Mobile's U.K business is in quite a contrast with T-Mobile USA, its largest foreign subsidiary, where the operator is keen on improving performance with significant investment, particularly in 3G networks (see United States: 23 April 2009: T-Mobile USA Targets M2M Market with Embedded SIM and Smart Meter Partnership), as opposed to cost-cutting and streamlining. At the end of the first quarter this year, Deutsche Telekom was forced to write down the value of T-Mobile U.K. by 1.8 billion euro (US$2.4 billion), to roughly US$5.3 billion, as the unit continued to struggle to hold market share as competition increased. This write-down led to calls from shareholders to delay any sale until the market becomes more buoyant. The recession means Deutsche Telekom is unlikely to get a decent price for its U.K. operations—and the German giant is not facing the kind of financial difficulties which could force a fire sale.

• Competition in the U.K. Market set to Increase: The U.K. mobile sector is one of the most competitive in the world, with five major operators (Telefónica's O2, Vodafone, Orange, T-Mobile and Hutchison's 3) vying for share of a stagnant market, and with no operator holding more than 30% of subscribers. A drop in consumer spending due to the deepening recession, coupled with a fierce price war and an increase in regulation (see United Kingdom: 20 May 2009: Ofcom Launches Review of Mobile Termination Rates Post-2011) have meant that times are tough. However, while profits are dwindling, none of the U.K. operators is close to seeing a loss (see United Kingdom: 19 May 2009: Vodafone's Full-Year Profits Halve, Accelerates Cost Cutting), and the market still continues to show growth, particularly in the burgeoning mobile broadband and data sectors. IHS Global Insight believes Deutsche Telekom will give new CEO Richard Moat a chance to turn things around, meaning T-Mobile U.K. is unlikely to be sold at any point in the near future.