Deutsche Telekom and France Telecom Complete UK Merger, Create New Market Leader

By Gary Kim, Contributing Editor

Deutsche Telekom and France Telecom have successfully completed of the merger of their U.K. mobile networks, creating a firm that leads the market share rankings in the United Kingdom at 37 percent share, 28.4 million customers and revenue of €9.4 billion (£8.2B; $13.5B).

Orange U.K. chief executive Tom Alexander becomes CEO of the new company, while T-Mobile (News - Alert) UK managing director Richard Moat takes the position of CFO and deputy CEO.

The merger is a fairly direct response to business strategy in a highly competitive and saturated market, where additional growth can come only at the expense of rival providers, and where controlling expenses is as important as generating revenues. 

Mobile penetration in the U.K. market is at about 118 percent, according to researchers at Ovum (News - Alert). 

The merger will provide a chance to reduce operating as well as capital investment costs, but mobile operators also will be trying lots of other things to stabilize revenue, such as enticing customers to sign longer contracts of perhaps 18 months, compared to the year-long contracts that are the norm at the moment.

But the shift in market dynamics is significant. Up to this point, O2 and Vodafone (News - Alert) have had the leading market shares. Probably more important, a market with four major players would become a market with just three dominant providers. The new market leadership also means it will be easier for the new company to sell  “must have” phones, such as the iPhone (News - Alert) and Blackberry Storm, or any other leading-edge phones that come to market. 

The merged venture is expected to lead to operational cost savings of £445 million ($730 million) per year from 2014 onwards. These savings will be dependent on up to £800 million ($1.3 billion) in integration costs over the period from 2010 to 2014.

The potential for capital expenditure savings, net of integration capex, is estimated at £620 million ($1 billion) on a cumulative basis over the 2010 to 2014 period, prior to stabilizing at approximately £100 million a year from 2015 onwards.

To create the new joint venture, Deutsche Telekom is contributing T-Mobile UK on a cash-free, debt-free basis, including T-Mobile UK’s 50 percent holding in its 3G network joint venture with Hutchison and gross tax losses carried forward of at least £1.5 billion. France Telecom is contributing the whole of Orange UK including £1.25 billion of intra-group net debt in order to equalize the value of the contributions to the joint venture.

Deutsche Telekom is to also grant a £625 million shareholder loan to the joint venture, which will be used to simultaneously reimburse £625 million to France Telecom. As a result, the joint venture would have indebtedness of £1.25 billion, represented by two shareholder loans of £625 million held by each of Deutsche Telekom and France Telecom.

(source: http://data-voice-solutions.tmcnet.com/topics/network/articles/80650-deutsche-telekom-france-telecom-complete-uk-merger-create.htm)