Why a Vodafone and T-Mobile tie up makes sense

FOR Sale. British mobile network operator. Number four in market. Unprofitable. One neglectful German owner. &pound;3bn or nearest offer. <br /><br />If JP Morgan, which has been appointed to drum up interest in a potential sale of Deutsche Telekom&rsquo;s T-Mobile UK, were to write a classified ad for the business, this is how it would read. One imagines there would be little interest.&nbsp; <br /><br />It might seem strange, then, that the UK&rsquo;s three biggest network operators &ndash; O2, Vodafone and Orange &ndash; have all been identified as possible bidders for the business. Vodafone, which could become the UK&rsquo;s biggest operator by market share if it cut a deal, is currently scouring the firm&rsquo;s books while Telefonica&rsquo;s O2 &ndash; currently top dog &ndash; will kick the tyres next. Meanwhile, France Telecom&rsquo;s Orange is adamant that it has not tabled a bid. <br /><br />So why are successful firms like Vodafone interested in buying a set of substandard assets? The answer lies in the peculiar nature of the British mobile telecoms market. Not forgetting the runt of the litter, Hutchison Whampoa&rsquo;s 3, there are five operators in the UK that chase around 70m customers. That makes Britain one of the most competitive markets in the world, which is bad news for profits. <br /><br /><strong>CUT THROAT COMPETITION</strong> <br />Such cut throat competition isn&rsquo;t always good for customers either. UBS estimates that profit margins for the five UK players are 11 percentage points lower than the European average, which means that the UK has suffered from years of underinvestment.<br /><br />Normally, British regulators would be loath to wave through a merger that will almost certainly see prices jump for customers. But the government is desperate to improve the UK&rsquo;s digital infrastructure, and currently the network carriers say they need more profit to invest. That&rsquo;s why analysts think that the deal won&rsquo;t be vetoed. <br /><br />JP Morgan is examining a possible sale as one of a number of options and Deutsche Telekom sources say that the firm wants to give Richard Moat, T-Mobile UK&rsquo;s new boss, a chance. But he will find it hard to turn the ailing business around without significant cash from its parent company, which seems unlikely. <br /><br />Privately, Deutsche Telekom insiders have long-said that a sale of the business is the most likely outcome. A few months ago, when Moat&rsquo;s predecessor Jim Hyde left the company, T-Mobile sources that his resolute opposition to a sale was one of the main reasons for his departure. <br /><br />For all the hype, however, talks are still at an early stage. As a source close to one of the potential bidders told me earlier this week, &ldquo;JP Morgan has asked us to look up T-Mobile&rsquo;s trouser leg &ndash; the chances are we won&rsquo;t like what we find&rdquo;.