FT and DT enter exclusive negotiations for UK tie-up

European giants Deutsche Telekom (DT) and France Telecom (FT) have announced that they have started exclusive negotiations aimed at merging their respective British mobile operations, T-Mobile UK and Orange UK, in a new company in which each will hold 50%. Should the merger be completed the newly formed mobile operator will overtake current market leader O2 UK, itself a subsidiary of Spain’s Telefonica, and would have a combined customer base of approximately 32.44 million based on figures held by TeleGeography’s GlobalComms database for the end of June 2009 , giving it around 44% of the market. The operators claim that the combined entity will be better placed to invest in new services and to exploit new technologies, and will be better equipped to compete with both O2 UK and Vodafone UK. Commenting on the development Gervais Pellissier, CFO of France Telecom said: ‘By combining our operations in the UK, we anticipate the long-awaited consolidation in one of Europe’s most competitive markets, thereby creating a well positioned player. This will reinforce fair competition and will provide strong benefits for our customers through improved coverage, quality of service and an enhanced capacity to develop new services and technologies.’

Under the proposed deal the board of the new joint venture (JV) is expected to have balanced representation from both DT and FT, and the management team is likely to be lead by Tom Alexander, current CEO of Orange UK, as CEO of the new company, while Richard Moat, CEO of T-Mobile UK, would act as the JV COO. Additionally, it is understood that the T-Mobile UK and Orange UK brands will be retained for at least 18 months after any transaction between the two parent companies is completed; during that period the management team will consider alternative branding options and develop a recommendation for shareholder approval. Prior to the signing of any agreement, which is expected by end-October, both DT and FT will undertake due diligence and the final agreement will then be subject to the approval of the supervisory board of DT and the board of directors of FT. The completion of any agreed deal, however, will still be conditional on approval by the relevant competition authorities.

According to the two operators, the merger and integration of T-Mobile with Orange is expected to generate estimated synergies with a net present value in excess of GBP3.5 billion (USD5.74 billion), due in part to likely large-scale rationalisation, leading to savings most notably in site rental expenses, network operation and maintenance expenses. In order to achieve its targeted savings the JV is likely to invest between GBP600 million and GBP800 million in integration costs over the period 2010-2014, with these costs mostly covering the decommissioning of mobile sites and the rationalisation of retail stores.