After months of speculation over possible suitors, the fate of T-Mobile UK has been settled. Deutsche Telekom, owner of the struggling UK mobile operator, is forming a 50-50 joint venture with France Telecom subsidiary Orange UK. The new JV will be the largest mobile operator in the UK with a total customer base in excess of 28 million, equating to around 37 per cent of the UK mobile market.
The deal completely changes the dynamics of the UK mobile market, forcing current leader Telefonica O2 and Vodafone into second and third place with minnow 3UK bringing up the rear. The new entity had combined revenues of approximately £7.7 billion in 2008. Existing branding will continue for the next eighteen months whilst the two companies develop and agree on a new corporate brand.
The two parent companies are committed to the joint venture for three years, after which one of them can buy the other out.
On the financial side, Deutsche Telekom is putting T-Mobile UK into the JV on a cash-free, debt-free basis, adding in T-Mobile UK's 50 percent holding in its 3G network joint venture with Hutchison and with gross tax losses carried forward of at least £1.5 billion. France Telecom is putting in the whole of Orange UK including £1.25 billion of intra-group net debt in order to equalise the value of the contributions to the joint venture. Orange UK's fixed assets are part of the deal.
The intention is to realise savings of £445 million a year from 2014 onwards but there will need to be expenditure of up to £800 million in the intervening period, mainly caused by the decommissioning of cellsites, rationalisation of retail outlets and streamlining of operations. However, there will be significant economies in capital expenditure through network integration and unification as well a joint 3G coverage expansion. The two companies believe there is the potential to save up to £620 million in capex on a cumulative basis in the period up to 2014.
Currently T-Mobile UK has around 10,000 2G base stations with Orange having some 13,000. The two companies also have around 7,000 3G base stations each. The plan is to upgrade all the 2G sites to support 3G, a process which T-Mobile has already begun, with the long term aim of the JV having between 14,000 and 16,000 multiple use base stations.
Deutsche Telekom and France Telecom will spend the next two months carrying out due diligence with the intention of presenting the new company to UK regulator Ofcom and the European Commission at the end of October.
It is not expected that Ofcom will raise any objections although as this situation has never previously occurred in the UK the approval process may take as long as six months. There is also the possibility that Ofcom may impose some stringent conditions, possibly requiring a commitment to expanding rural broadband coverage. Concerns have been expressed that the deal will reduce consumer choice and perhaps increase prices but the consensus is that the UK market was over-competitive and a reduction in the number of players is likely to be good for customers in the longer term.
T-Mobile UK's MVNO deal with Virgin Mobile is already at an end as the latter has evoked the ‘new ownership' clause in the contract. The Radio Access Network sharing agreement between T-Mobile and 3UK is unaffected and is likely to continue under the new company.
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