Deutsche Telekom AG, Europe’s biggest phone company, and France Telecom SA plan to merge their U.K. mobile-phone units to create the country’s largest cellular operator with revenue of 9.4 billion euros ($13.5 billion).
The companies entered exclusive talks to combine Deutsche Telekom’s T-Mobile UK unit and France Telecom’s Orange and plan to seal the deal at the end of October. The 50-50 venture will result in savings of more than 4 billion euros in network maintenance, marketing and administrative costs, the companies said in an e-mailed statement today.
The joint venture will have 28.4 million users, or 37 percent of the U.K. market, ousting Telefonica SA’s O2 service from the top spot. The deal shrinks the number of mobile-phone operators in the U.K. to four, with the others being Vodafone Group Plc and Hutchison Whampoa Ltd., helping shore up profit in one of the most competitive markets in Europe.
“Investors are clearly relieved that the companies have found a solution to cut costs and improve their position in the crowded and competitive U.K. market,” said Boris Boehm, a fund manager at Aramea Asset Management AG in Hamburg, which oversees the equivalent of $1 billion, including Deutsche Telekom and France Telecom shares. “Both companies had problems competing on a standalone basis, so this deal makes sense.”
France Telecom shares climbed 1.8 percent to 18.44 euros in Paris trading. Deutsche Telekom rose 1.9 percent to 9.63 euros in Frankfurt.
Dominant Player
Phone companies are reducing costs as clients spend less amid the economic slowdown. Vodafone, Deutsche Telekom, Royal KPN NV and Mobistar SA said in May that the recession was eroding profit as consumers curb mobile-phone use.
For Deutsche Telekom, the fourth out of five operators in the market, the deal provides a way to draw on the combined entity’s dominant position. Earlier this year, it booked a writedown of 1.8 billion euros on T-Mobile UK and said the unit’s performance was “dissatisfactory.”
“This combination of the current number three and number four players will create the new number one player,” Deutsche Telekom Chief Financial Officer Timotheus Hoettges told reporters and analysts on a conference call. “This gives us a significant lead ahead of our competitor, providing us with the critical mass that we need in the U.K. market.”
For France Telecom, the transaction is the first major venture after it ended a 244 billion-krona ($34 billion) bid for Sweden’s TeliaSonera AB in June 2008 over price disagreements.
Costs, Investments
The two companies have committed themselves to staying in the joint venture for at least three years, keeping their separate T-Mobile and Orange brands for 18 months after the deal is completed. Tom Alexander, the chief executive officer of Orange U.K. will lead the new entity, while Richard Moat, the CEO of T-Mobile UK, will become chief operation officer.
Deutsche Telekom said the joint venture expects to spend between 600 million pounds ($988 million) and 800 million pounds between 2010 and 2014 on integrating the two units by closing down mobile sites and combining retail outlets. Capital- expenditure savings may total 620 million pounds in the years to 2014, and 100 million pounds a year from 2015 onwards.
To equalize the contributions to the joint venture, Deutsche Telekom’s T-Mobile UK will come in on a cash-free, debt-free basis, while France Telecom’s Orange will enter the venture with 1.25 billion pounds of debt, of which Deutsche Telekom will reimburse France Telecom half, or 625 million pounds in cash. The venture will have debt of 1.25 billion pounds in two shareholder loans held by the two owners.
‘Big Winner’
T-Mobile UK will also bring a 50 percent holding in the high-speed 3G network that it shares with Hutchison’s U.K. mobile-phone unit into the joint venture, as well as gross tax losses carried forward of at least 1.5 billion pounds.
“France Telecom is clearly the big winner of the joint venture in the U.K.,” Sal. Oppenheim’s analysts said in a note to clients today. “Through the venture, France Telecom will be able to raise its margins in the U.K. significantly, while improving its cash-flow profile.” Perella Weinberg Partners advised the Paris-based company on the deal.
Deutsche Telekom said the transaction should be accretive from next year in terms of free cash-flow per share, of which 90 percent will be distributed equally between it and France Telecom. From 2011, the joint venture is expected to make a positive contribution in terms of earnings per share.
Deutsche Telekom’s Hoettges said that while the venture will boost margins and cut costs, he doesn’t see “huge” market-share growth or an increase in average revenue per user.
Vodafone Talks
The merger plan ends months of speculation during which Deutsche Telekom was predicted to sell or fold its U.K. unit into a joint venture. Bonn, Germany-based Deutsche Telekom was in talks with Vodafone, Telefonica and France Telecom, and retained JPMorgan Chase & Co. to review options, three people familiar with the talks said in June.
Subscribers to T-Mobile UK services fell 0.6 percent in the second quarter from the preceding three months, according to Deutsche Telekom. It was the only one of the company’s 16 mobile divisions to post a decline in users.
The German company was battling against O2, owned by Telefonica, which had 27.7 percent of the U.K. mobile-phone market by revenue in the second quarter, followed by Vodafone’s 24.7 percent and France Telecom’s 21.5 percent.
The venture “is significant for the U.K. market in that it will reduce the number of players,” said Jacques Abramowicz, head of technology, media and telecommunications at Silvia Quandt Research Gmbh in Frankfurt. “Margins are not going to improve massively. I would not want to be in that market.”
National WorkerRF Safety Crisis Video Our nations’ workers and the welfare of their families
are at risk! Watch the video to see how.
Deutsche Telekom, France Telecom Plan U.K. Venture
Source: Bloomberg
Date: 09/08/2009
