T-Mobile and Orange plan tie-up in UK

DEUTSCHE Telekom and France Telecom yesterday confirmed that they plan to merge their UK operations in a venture that will grab the top spot in the UK mobile market.<br /><br />The operators said they were in exclusive negotiations over the 50:50 merger between German-owned T-Mobile UK and France Telecom&rsquo;s Orange UK business, and that they hope to reach an agreement by the end of October.<br /><br />The tie-up will create an entity that holds a 37 per cent share of UK subscribers, and is expected to create synergies of up to &euro;4bn (&pound;3.5bn).<br /><br />The transaction should also boost free cash flow per share from 2010 and earnings per share from 2011, though the fully merged company is unlikely to launch for 18 months.<br /><br />The news ended months of speculation that Deutsche Telekom was looking to dispose of T-Mobile UK, and heightened the City&rsquo;s focus on the potential impact of consolidation in the mobile industry.<br /><br />&ldquo;By combining our operations in the UK, we anticipate the long-awaited consolidation in one of Europe&rsquo;s most competitive markets,&rdquo; said France Telecom chief financial officer Gervais Pellissier.<br /><br />The merger will be subject to approvals by regulators, though intervention is unlikely as the UK mobile industry will still be more competitive than in other European countries.<br /><br />Deutsche Telekom would contribute T-Mobile UK on a cash-free, debt-free basis to the joint venture,. It will also include a 50 per cent holding in its 3G network joint venture with Hutchison as well as carried over losses &pound;1.5bn. <br /><br />France Telecom will contribute the whole of Orange UK, and will include &pound;1.25bn of intra-group net debt to compensate for the fact that its operations are more valuable than T-Mobile UK&rsquo;s. <br /><br />Deutsche Telekom will also give a &pound;625m loan to the venture.<br /><br /><strong>ANALYSIS T-ORANGE</strong><br /><br />The joint venture between T-Mobile UK and Orange, or T-Orange as it has been dubbed, looks set to shake up the UK mobile industry.<br /><br />Many analysts already expected Telefonica-owned O2 to lose its exclusivity deal with Apple iPhone when it comes under review next month, as customers become increasingly frustrated with its unreliable 3G coverage.<br /><br />The creation of T-Orange will result in a strong network with huge 3G capacity, and could be seen as a natural partner for multi-media smartphones such as the iPhone. France Telecom&rsquo;s chief financial officer Gervais Pellissier highlighted yesterday that both operators are already &ldquo;both very good partners of Apple&rdquo; in their domestic markets, further fuelling speculation that a deal could be on the cards.<br /><br />In addition, the new venture could throw a spanner in the works for the government&rsquo;s Digital Britain proposal&rsquo;s for universal broadband access by 2012. The scheme was reliant on mobile companies sharing some of their existing spectrum prior to the analogue switch off, as well as some new spectrum, and a deal was expected by the end of this month. <br /><br />The reduction of the number of networks involved, from five to four, would make the current proposals, and caps on the amount of spectrum a network is allowed, obsolete.<br /><br />Although the merger could decrease competition, the firms say it will enable them to invest more and improve the customer experience.