The great T-Mobile bidding war

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T-Mobile UK has been put up for sale by its parent, Deutsche Telekom. That is the rumour, and it is one its main rivals in the UK are doing little to assuage, despite persistent “no comment” from official spokespeople.

It is believed Deutsche Telekom is asking for around £3.4 billion, tops, for the UK business, which is startling in terms of the contemporary valuation of network operations when compared with the £8.4 billion Deutsche Telekom originally paid for One2One back in 1999, and the further £4 billion it invested in a 3G licence in 2000. Plainly, that represents a huge loss on its initial investment.

But rumours the likes of Vodafone, Orange and O2 are kicking the tyres of Deutsche Telekom’s UK mobile network should be treated seriously. The news coverage that has spilled forth in recent weeks, following a Financial Times report Vodafone was interested in it, has been remarkable and unchecked. All have naturally refused to comment on the stories, but they have not gone away, and it is now reported the trio are engaged in a fierce bidding war for the unit.

But first some perspective. There is a decent argument to suggest Vodafone, and subsequently O2 and Orange, have leaked stories of tentative interest in a T-Mobile takeover to the national press, with interest in publicity around its woeful performance driving value down further.

Deutsche Telekom chief executive Rene Obermann has spoken of concerns for the UK business, issuing a profit warning and writing down the value of the UK business by £1.8 billion.

The German government and US private equity fund Blackstone, which own 32 per cent and five per cent of Deutsche Telekom’s shares respectively, have been pressuring Obermann and his board to make a rapid decision on what to do with its troublesome satellite divisions – principally the UK, US and Austrian units. JP Morgan has been appointed by it to advise on its strategy for the UK, and new UK managing director Richard Moat has been drafted in from Orange Romania to manage costs.

UK analysts claim the response from journalists seeking comment following The Financial Times report last week of Vodafone’s interest was huge, unprecedented in recent coverage of the sector. Analysts covering the German market, however, shrugged at the reports. 

Dan Bieler, at analyst IDC Germany, says: “Look, I talk to Deutsche Telekom regularly and I really doubt it will sell. Let’s remember, Rene Oberman was involved in buying it from One2One in the first place; it is his baby, so I really doubt they will sell it off. I’m sure there are discussions going on but I’m less sure whether Deutsche Telekom is desperate to sell, and I would not be at all surprised if these discussions went away.

“But there is a price attached and it’s in the interest of O2 and Vodafone, or whoever, to talk the price down, to say T-Mobile is a poor performer; that’s how business gets done. Deutsche Telekom is clearly concerned about T-Mobile UK, but there are other markets in which T-Mobile operates that it does even less well in. T-Mobile Austria, although smaller, is in a very similar situation.

“I don’t get the feeling this T-Mobile story is top of its agenda. Yes it’s something to look at and correct, but the top team at Deutsche Telekom is not waking up each morning, wondering how to get shot of T-Mobile UK.”

Bieler goes on to suggest Deutsche Telekom, generating between €6 billion and €7 billion in free cash annually, is in a position to acquire another operator in the UK market if it wanted to go on with its UK venture and force consolidation. The idea, albeit unlikely, should not be ruled out, he said.

“Take this in to consideration, as well as the ability to draw more money down against this cash flow, and there are significant opportunities for it.”

Nevertheless, it is clear all UK incumbents are desperate for consolidation to improve shrinking margins, and taking out T-Mobile is a surefire way to this end.

Orange-parent France Telecom was linked with a move for T-Mobile UK in May and June. However France Telecom chief financial officer Gervais Pellissier told Reuters in May he was unaware if Deutsch Telekom was even up for sale, and said pointedly “no” when asked if France Telecom would be interested if it was made available.

Orange requested Mobile News refer back to his statement when quizzed about present speculation.

Nevertheless, Orange’s UK management, led by Tom Alexander, looked over the books of retailer Phones 4U late last year, with a view to a purchase, before counting itself out. It demonstrates Orange’s appetite for consolidation too, whether on the high street or in airtime provision, as well as its openness to unorthodox solutions (confusingly, one strategy put forward was to continue running Phones 4U as an independent).

O2-parent Telefónica is also considering a bid, according to countless reports. It has fared considerably better during the past two years – 10.6 percent annual subscriber growth in 2008, and number one according to JD Power among networks-proper for customer satisfaction. However, O2 UK recognises the toughness of the market and as leader will also look to force change.

Competition among UK operators is more intense than in any Western European market, reflected in the fact all its players take less than 30 per cent share. France, Spain and Italy each contain operators with in excess of 40 per cent market share.

UK market consolidation would afford new scale to its chief instigators, and therefore better margins. The removal of T-Mobile would also eliminate a value-player, which trades on its generous airtime bundling, and so relieve downwards pressure on pricing.

Full article in Mobile News issue 443 (July 13, 2009).

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