Business Watch: T-Mobile sale

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Two months ago this column asked whether Richard Moat was about to become the shortest-serving managing director of T-Mobile UK.

Now that possibility even seems more likely after it emerged that Deutsche Telekom, T-Mobile’s German parent, has hired investment bankers at JP Morgan to explore so-called “strategic options” for the group.

More often than not that is code for putting the business up for sale – but whether a sale actually goes ahead remains to be seen.

One strategic option is, of course, for Deutsche Telekom to hold onto the business. T-Mobile appears to be playing down the speculation – understandably given the uncertainty it will cause within the ranks.

But what is known is that Vodafone has had a peek at the business and is considering making a bid that would prompt a massive shake-up of the UK mobile sector.

If Vodafone were to try and buy T-Mobile UK, or to merge their UK businesses into a 50:50 joint venture (as it has done with 3 in Australia) it would command more than 40 per cent of the UK market.

That would be more than enough to attract the attention of the Competition Commission, which typically investigates any deal that gives a company more than 30 per cent of a particular market.

And given the amount of regulatory scrutiny the mobile networks have been subject to in recent years – with endless reviews into termination fees and roaming charges – one could expect forensic analysis by the watchdogs.

Analysts think a deal might get through the hoops however pointing out that in markets such as France and Germany there are operators with more than 40 per cent market share.

Indeed the UK is the only major European market with five mobile networks, a throwback to the turn of the millennium when the government raised £22.5 billion selling 3G licences, including one to the new entrant, 3.

It is that auction – and the way it was rigged to generate maximum value for the government – that has hamstrung the mobile industry here ever since.

There are simply too many networks as evidenced by the tremendous pressure on each player’s profit margins, and the job cuts currently ripping through the industry.

Deustche Telekom has already written down the value of T-Mobile UK after a year in which it underperformed the rest of the industry.

Vodafone is now said to be considering a bid of £2.5 billion to £3.4 billion.

It’s a lot of money but many analysts like the idea of Vodafone swooping for the business. Terry Sinclair, veteran telecoms analyst at Citigroup, thinks the combination could boost Vodafone’s earnings by £200 million to £300 million within three to five years.

Needless to say that would mean a lot of cost cutting, which is the main reason for the tie-up: if your revenues aren’t growing enough the only way to boost profits is to squeeze your cost base.

Vodafone would also be able to put more customers over one network and would have extra buying power and a greater footprint to roll out new products and services.

But Michael Kovacocy at stockbroker Daiwas reckoned now is not the time for Deutsche Telekom to be selling out of the UK. As for Vodafone, he said: “The risk of overpaying and being left to deal with T-Mobile’s messy UK operations should not be overlooked.”

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

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