Orange and T-Mobile to create UK's largest mobile company

Orange and T-Mobile are currently the third and fourth-largest mobile phone operators in the UK market.

• Deal expected to lead to significant job losses
• Venture will operate under one name by 2012
• 5,000 fewer mobile phone masts needed

Orange and T-Mobile are merging their UK operations to create the country's largest mobile phone operator, with 28.4 million customers or 37% of the market, leapfrogging rivals O2 and Vodafone.

But the deal is expected to lead to significant job losses among the combined workforce of 19,000 as the two companies rationalise their networks, axe call centre staff and close high street retail stores in pursuit of £3.5bn worth of cost savings. T-Mobile UK employs 6,400 and Orange 12,000.

It should, however, lead to a reduction in mobile phone masts, as the new venture will need at least 5,000 fewer than the two companies operate today.

By 2012, the venture will also be operating under a single name with either Orange, owned by France Telecom, or T-Mobile, owned by Deutsche Telekom, resigned to the dustbin of British brand history. No decision will be taken on which brand is jettisoned until the merger gets clearance from European regulators, which is likely to take several months. The venture also has about a million residential broadband customers.

France Telecom's chief financial officer Gervais Pellissier said the deal would "on the one hand fundamentally change our respective positions in the UK and on the other hand bring substantial benefits to consumers in the UK". His opposite number at Deutsche Telekom, Timotheus Höttges, added that the merger was "the first step towards creating the new mobile champion in the UK".

Tough decisions

Analysts, however, remain to be convinced that the structure of the deal – in which both parents will have a 50% share – will not leave the company unable to make tough decisions if its board is split down Orange and T-Mobile lines. The two parent companies have picked board members, with Orange UK boss Tom Alexander taking the chief executive's post and new T-Mobile UK head Richard Moat becoming chief operating officer. Deutsche Telekom will pick a finance chief and a chairman – who does not get a casting vote in meetings – with France Telecom picking the venture's human resources director. Both parent companies are locked into the joint venture for at least three years.

The deal gives Deutsche Telekom a solution to its problems in the UK, where T-Mobile lags in fourth place and has consistently underperformed its rivals. It also allows Orange to improve its margins by pooling its wireless network assets with T-Mobile, having been jilted by its original network partner Vodafone in favour of O2 in March.

The deal should also cut the number of mobile phone masts in the country. Orange has 13,000 current generation – or 2G - masts and 7,000 that carry mobile-broadband – or 3G – signals. T-Mobile has 10,000 2G masts and 7,000 3G. After the deal the combined group expects to have 14,000 to 16,000 of both sorts of mast, giving it up to 32,000, or at least 5,000 fewer than today.

T-Mobile is currently sharing its 3G network with the UK's fifth-placed mobile operator 3, and that deal will be included in the joint venture. Orange, meanwhile, already provides coverage for 3's basic 2G service and Alexander explained "we are very excited about the [deal] because the specific synergies with T-Mobile and 3 are very strong". However a deal still needs to be struck with 3's owner, Hong Kong-based conglomerate Hutchison Whampoa.

T-Mobile also carries traffic for Virgin Mobile, which has 4.8 million customers and used to be run by Alexander, and Moat said "we have their support" for the merger. Including the Virgin Mobile customers in the figures for the merged group would give it more than 33 million customers or more than 40% of the market.

Overtures

Orange has made several overtures to Deutsche Telekom about merging with T-Mobile over the past year, all of which were rebuffed. But more recently Deutsche Telekom's management has been looking at all options for its UK operation. Last week it received highly conditional cash offers from O2 and Vodafone but the price – at about £3.5bn – was lower than chief executive Rene Obermann had hoped.

Höttges said: "We have to think about what is the best solution for the difficult UK market that we are in … we came to the conclusion that the best value for our shareholders in the short term and the long term is going to be created by this joint venture."

Some analysts wondered whether either O2 or Vodafone might return with a sweetened offer. Vodafone, however, is understood to have ruled out making a new bid and its shares rose in the morning on relief that it was not going spend its cash bailing out T-Mobile.

To create the new joint venture, Deutsche Telekom will contribute T-Mobile UK on a cash-free, debt-free basis, including T-Mobile UK's 50% holding in its 3G network joint venture with Hutchison and gross tax losses carried forward of at least £1.5bn. France Telecom will contribute the whole of Orange UK, including £1.25bn of intra-group net debt. After the deal is done, Deutsche Telekom will grant a £625m shareholder loan to the joint venture, which will be used to simultaneously reimburse £625m to France Telecom. As a result, the joint venture will have indebtedness of £1.25bn, represented by two shareholder loans of £625m. The two shareholders will receive 90% of the cash created by the venture.

The combined business would have made revenues of €9.4bn (£7.7bn) last year and profits before financial charges of €2.1bn. The merger should create annual operating cost savings of more than £445m from 2014 as a result of network and IT cuts, store closures and job cuts.

"Of course, realising the synergies there are going to be some job losses," admitted Alexander, while Moat added: "We believe there are opportunities to optimise our current workforce."

The programme of store closures and job reductions, however, will cost £600m to £800m between next year and 2014. The company will also be able to reduce its capital expenditure, not least because the two firms will need fewer new mast sites. The two companies reckon they can save £620m between 2010 and 2014, and £100m a year from 2015 onwards. Some of the cost cuts could also come from reduced need for new wireless spectrum.

Digital vision

But the deal will present some problems for the government's vision of creating a Digital Britain. That plan, released in June by then communications minister Lord Carter, included giving mobile broadband an important part to play in getting broadband services to everyone in the country by 2012. To do that, however, required the mobile phone companies to share some of their existing spectrum ahead of the sale of the old analogue TV signal and some new spectrum that is perfect for super-fast broadband over the next two years. The five networks have been locked in talks for months and the government had demanded a deal by the end of the month. Those negotiations, however, were based on their being five networks, not four, and the combined Orange/T-Mobile would break the caps on the amount of spectrum any one network can hold that were being proposed.

The deal, however, may give Orange and T-Mobile an advantage as they try to wrest Apple's iconic iPhone away from its exclusive UK network O2. Both companies have been trying to persuade Apple to expand the number of operators that can stock the phone, when O2's deal reaches its second anniversary in November.

France Telecom's chief financial officer Gervais Pellissier said "we are both very good partners of Apple in our domestic markets and [the merger means] we have a very good chance to be a strong partner here in the UK".

Source: The Guardian, 8th September, 2009

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