European Mobile Industry Consolidates

Plans by Deutsche Telekom and France Telekom to merge their U.K. phone units is a sign of further consolidation in the industry as financial pressure increases on European phone companies. The deal, announced Sept. 8, would create the U.K.’s largest cellular operator, catapulting the merged entity ahead of Telefonica’s 02 unit and pushing rival Vodafone to number three in its home market.

T-Mobile was fourth in line in the U.K., behind O2, which had a 27.7% market share, Vodafone which had 24.7% and Orange, which had 21.5%.“The merger of Orange and T-Mobile is  a perfect match from a financial and geographical perspective, “ says John Strand, founder and chief executive of Strand Consult, an independent mobile consultancy based in Copenhagen, Denmark.

The deal ends months of speculation that Deutsche Telekom would sell its U.K. unit or fold it into a joint venture. Deutsche Telekom was in talks with Vodafone, Telefonica and France Telecom and retained JP Morgan Chase & Co. to review options, according to press reports. In the end “rather than disposing of a valuable, but underperforming asset (Deutsche Telekom) maintains a position in the vibrant U.K. market and its shareholders will continue to benefit from the associated revenues,” British-based mobile consultacy CCS Insight  said in a research note.

If the deal is approved by antitrust authorities the 50-50 venture will have 28.4 million users, or 37% of the U.K. market, and result in savings to the two operators of more than €4 billion  in network maintenance, marketing and administration costs, the French and German phone companies said in a statement. Large scale savings are expected over the first five years as a result of the integration and unification of the networks and from jointly expanding 3G coverage.

The unification of the two operators’ networks is part of a trend in which operators across Europe – including rivals – are sharing the cost of the build-out of 3G networks.  For example, in Sweden, Telia and Tele2 have teamed on 3G buildout as have Hutchison Whampoa’s 3 and Telenor, says Strand.

The proposed merger between T-Mobile and Orange’s U.K. operations is a double edged sword for equipment provider Alcatel-Lucent, which could lose its position as Orange’s 3G supplier, saays Richard Windsor, a global technology specialist at Nomura Securities in London. However, should the joint venture decide it needs two suppliers it could also gain the T-Mobile network, Windsor says.

Operators are under heavy financial pressure in Europe. Carriers are facing huge investments in 3G roll-out, having to spend billions to bid for additional spectrum to improve rural and inner city coverage of third generation services. The expenitures come as the European Commission is putting the squeeze on roaming charges.

“All of this is leading to consolidation,” says Strand. “There will be a smaller number of mobile operators in Europe, no doubt about it.” Already, he points out, the Netherlands has gone from five mobile operators to just three, while Austria has moved from five operators to four.

Now the U.K. is moving from four to three operators. The management team of the new merged entity will be lead by Tom Alexander, currently CEO of Orange U.K.  and the former head of the U.K. unit of Virgin Mobile, a mobile virtual network operator (MVNO). Richard Moat, currently chief executive of T-Mobile U.K., has been named the new venture’s chief operating officer. Before going to work for T-Mobile Moat held management positions at Orange.

While analysts applaud the move and endorse the management team picks they warn that the joint venture could run into some rough patches, if history is any guide. France Telekom and Deutsche Telekom formed a joint venture called Global One with U.S. operator Sprint in 1996, offering international voice and data services. The venture was never a financial success and was plagued by cultural and political issues. In 2000 France Telecom bought out the other partners.

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