The news that Vodafone is chewing over a bid for T-Mobile UK shouldn't surprise many given that Deutsche Telekom's boss, René Obermann, dropped heavy hints last year that consolidation in the UK market was inevitable. What is more interesting is that Vodafone is the company seeking to acquire T-Mobile UK.
While industry analysts have been quick to outline the hurdles Vodafone will need to overcome in purchasing T-Mobile UK, the balance of opinion would seem to weigh in Vodafone's favour.
- The UK regulator could take a relaxed approach to Vodafone leaping into the UK #1 slot with a 40 per cent market share given such circumstances exist in France, Italy and Spain.
- The deal could boost network sharing--and thereby cost savings--although existing partnerships (Vodafone and O2, and T-Mobile with 3UK) could make the implementation complex.
- Vodafone could strike a partnership agreement with T-Mobile UK, as it has done with 3 in Australia.
- Vodafone CEO Vittorio Colao has indicated his willingness to become a key driver in the consolidation of the UK market.
- Some observers believe Vodafone could help finance the deal when (if?) Verizon starts paying significant dividends from around 2010.
However, there are issues that place a less positive spin on a merger.
- The UK operations of both companies are underperforming. In Q3/08, Q4/08 and Q1/09, Vodafone and T-Mobile suffered revenue declines whereas O2 and Orange grew theirs.
- Vodafone has pledged much of its cash to shareholders and there is little headroom for acquisitions without higher borrowing, although the company could raise cash if needed.
- Vodafone and Telefonica could be parted from some of their valuable 900MHz spectrum, and an acquisition of T-Mobile would trigger further scrutiny from the regulator because of the large spectrum ownership of a combined group.
- Deutsche Telekom is not a forced seller and the £3.3 billion value placed on T-Mobile UK could be a significant stumbling block. The company has 16.7 customers including those registered with Virgin Mobile.
While Deutsche Telekom has repeatedly hinted at a sale of its UK unit, on occasions it has backtracked stating that it will continue to invest to turnaround the struggling subsidiary - appointing a new UK managing director only days ago. However, the outcome is not totally in Deutsche Telekom's hands with its two largest shareholders, the German government and private equity group Blackstone, wanting to be rid of the sickly child.
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