T-Mobile, Orange to form UK's top mobile operator

[September 08, 2009]  LONDON (AP) -- Deutsche Telekom AG and France Telecom SA said Tuesday they intend to combine their British mobile phone units -- T-Mobile UK and Orange UK -- to form the country's biggest mobile operator.

Deutsche Telekom said the two companies have entered exclusive negotiations on combining its struggling U.K. unit with France Telecom's in a 50-50 joint venture.

The announcement follows reports that Telefonica of Spain, owner of U.K. market leader O2, and No. 2 Vodafone Group PLC had made informal offers of about 4 billion pounds ($6.5 billion) for T-Mobile.

The combined company would have a customer base of 28.4 mobile phone users, or about 37 percent of U.K. mobile subscribers at the end of 2008.

That would overtake O2, which has a 27 percent share of the U.K. market. Vodafone is second with 25 percent. Orange has 22 percent, T-Mobile 15 percent and Hutchison Whampoa's 3 has 8 percent.

In May, Deutsche Telekom reported a first-quarter loss of euro1.1 billion ($1.58 billion) which it blamed in part on intensifying competition, especially in the U.K.

The market reacted positively: France Telecom shares were up 3.1 percent at euro18.40, Deutsche Telekom rose 0.5 percent to euro9.45, and Vodafone gained 1.6 percent to 136.7 pence.

Jonathan Groocock, analyst at Investec Securities, said a deal could benefit the entire British mobile sector.

"The final outcome would be improved market returns for all parties as margins could stabilize," Groocock said in a research note on Monday.

The proposed deal "is expected to create substantial value for both shareholders," Deutsche Telekom said in a statement. It added that it expects the merger to generate synergies with a net present value of more than 3.5 billion pounds ($5.7 billion).

Signing of a deal is expected at the end of October, and its completion would be subject to approval by antitrust authorities, it added.

The business had combined 2008 revenue of some 7.7 billion pounds and earnings before interest, tax, depreciation and amortization of 1.7 billion pounds, Deutsche Telekom said.

Bonn-based Deutsche Telekom said it will contribute T-Mobile UK to the merged firm "on a cash-free, debt-free basis," including the British unit's 50 percent holding in a 3G network joint venture with Hutchison and gross tax losses carried forward of at least 1.5 billion pounds.

France Telecom would contribute Orange UK, including 1.25 billion pounds of intra-group net debt, "in order to equalize the value of the contributions to the joint venture," the statement said.

Once the deal closes, Deutsche Telekom would grant a 625 million-pound shareholder loan to the joint venture, which it said would be used to reimburse 625 million pounds to France Telecom.

The joint venture would have total debt of 1.25 billion pounds, represented by shareholder loans of 625 million pounds each held by Deutsche Telekom and France Telecom, the statement said.

[Associated Press; By ROBERT BARR]

AP reporter Geir Moulson in Berlin contributed to this report.

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