Orange and T-Mobile have joined forces to become the UK’s leading mobile operator with around 28.4 million customers.
The 50:50 joint venture will serve 37% of mobile phone users, overtaking O2 as the leading provider in the UK.
T-Mobile recently admitted it was struggling to compete against its larger rivals, having lost 87,000 customers in the three months to the end of June. Elsewhere, O2 had 27.7% of the UK mobile phone market by revenue in the second quarter, followed by Vodafone’s 24.7% and Orange’s 21.5%.
Although the deal has yet to be signed off, Orange and T-Mobile say it will bring “substantial benefits” to their customers.
Timotheus Höttges, chief finance officer at Deutsche Telekom, the German owner of T-Mobile, says customers will benefit from the best mobile broadband offer in Britain.
And Gervais Pellissier, chief finance officer of Orange’s owner, France Telecom, adds: "This will reinforce fair competition and will provide strong benefits for our customers through improved coverage, quality of service and an enhanced capacity to develop new services and technologies.”
Tom Alexander and Richard Moat, the current chief executive officers of Orange and T-Mobile respectively, will together head up the new venture. The firms estimate that they will save around £3.5 billion by combining their operations, although integrating the two businesses could cost as much as £800 million.
What does it mean for...
Orange and T-Mobile say the move will benefit their collective customers; as well as expanded network coverage and enhanced indoor and outdoor network quality, the soon-to-be mobile giant claims the merger will improve customer access to its network of shops and provide better customer services.
It will also have the capital to invest in new services and technologies. Prices could also come down, as the enlarged business will also be able to “compete more effectively" with its rivals, O2 and Vodafone.
Independent commentators agree.
Jason Glynn, communications expert at uSwitch.com, says: “Merging these two companies will ‘plug the network gap’, ultimately providing flawless network coverage across the country for these consumers. This new major player will now have every opportunity to provide some really competitive deals and give the UKs lethargic mobile phone industry the wake-up call it needs."
However, generally speaking, mergers are not considered good for competition in the long run. In this case, the merger will mean around 90% of mobile phone users in the UK are served by just three providers - putting customers of smaller networks at risk of losing out.
Ceri Stanaway, telecoms expert at Which?, says: “This merger does raise concerns about consumer choice in the long run, and there may also be an impact from a competition perspective on smaller networks such as 3, and virtual network operators such as Virgin Mobile."
However, Glynn is confident that Orange and T-Mobile, once merged, will move the telecoms industry forward: "This new organisation will not have to make huge investments into customer acquisition and all funding can be ploughed into investment into new services, exploiting new technologies and competing more aggressively with O2 and Vodafone."
In any case, the merger will take some time to complete, and the two brands will remain separate for the first 18 months after it eventually completes. During this time, “branding alternatives” will be considered.
The proposed merger puts an end to months of speculation over whether Deutsche Telekom would sell or merge its UK subsidiary into a joint venture. The firm had been in talks with Vodafone, Telefonica and France Telecom.
David Buik, a spokesman for BCG Partners, says the joint venture makes “an enormous amount of sense”.
He adds: “Vodafone has better things to do with its money. It can focus on investing in the emerging markets where there are better margins. The deal won’t cause the wrath of the Competition Commission either as the combined entity will have 38% share of the market which is under the magic number of 40%.”
A deal between Deutsche Telekom and Vodafone or Telefonica would have been likely to result in over 40% share of the UK mobile-phone market.
David Battersby, investment manager at Redmayne-Bentley Stockbrokers, agrees the merger is a good deal as a cost-saving exercise: “It’s been no secret that Deutsche Telekom has been looking to sell T-Mobile. It obviously realised that selling at the bottom of the market it was unlikely to get a good price for the business so merging was the other answer.”
Battersby believes that growth in the UK mobile phone sector has ended, meaning more businesses may look at merging.
Joshua Raymond, market strategist at City Index, says the joint venture is positive for private investors: “They will be creating a much bigger entity as well as being able to drive down the costs. After two or three years, investors should see some return from this move.”
Raymond also expects the announcement to boost the stockmarket, as it will put confidence back in the market and show that companies are looking at mergers and acquisitions again.