T-Mobile UK and Orange in joint venture

Deutsche Telekom and France Telecom have begun merger negotiations.
Deutsche Telekom and France Telecom on Tuesday said they wanted to merge their British mobile-phone units T-Mobile UK and Orange UK to create a market leader better able to compete with two remaining big rivals.

The two companies said they had started exclusive negotiations about putting their assets into a 50-50 joint venture by the end of October. The combined company would have 28.4 million subscriptions or 37 percent of the UK’s mobile-phone user base. Deutsche Telekom would put its business into the venture free of any debt, while France Telecom would shift 1.25 billion ($1.8 billion) of intra-group debt into the venture to make up for T-Mobile UK’s lower asset valuation, the German and French groups said. On top of that, France Telecom is set to receive 625 million ($1 billion) in cash. This would come as one-off payment from the joint venture, which would in turn refinance this transaction by taking a loan of similar size from its German parent. The board of the new management would be staffed equally by France Telecom and Deutsche Telekom, with Orange UK chief executive Tom Alexander retaining his title and Richard Moat, T-Mobile’s UK head, becoming chief operating officer. Management would be given 18 months to “develop a new branding strategy”, Deutsche Telekom and France Telecom said in a statement on Tuesday, noting they would continue to operate T-Mobile and Orange as separate brands until the shareholders signed off on any new strategy. The announcement takes Deutsche Telekom a step towards solving its problems in the UK, where fourth-placed T-Mobile UK has long suffered poor profitability as it has been squeezed by larger rivals Orange, Vodafone UK and Telefonica’s O2. Tim Hottges, Deutsche Telekom chief financial officer, said the deal was “the most value enhancing strategy” for the group. It would give T-Mobile UK “a clear and strong future” in “one of toughest and the most competitive” markets in Europe. The companies said the merged businesses on a pro-forma basis had made about €9.4 billion ($13.6 billion) in revenues last year, while earnings before interest, taxes, depreciation and amortization totaled €2.1 billion ($3.3 billion). The companies said merging networks and information technology, shifting more distribution to their own shops, and cutting administration costs should generate annual savings in operating expenditure of €510 million ($750 million) from 2014. Gervais Pellissier, France Telecom chief financial officer, said France Telecom and Deutsche Telekom shareholders would “benefit from higher profitability and an immediate cash flow per share accretion” while the debt position of the parent companies would not change. The companies calculate the deal should create synergies of a net present value in excess of €4 billion ($5.8 billion). They said it should be accretive in terms of free cash flow from next year and in terms of earnings per share in 2011.