So now we can add O2’s name to the list of companies that are interested in taking a peek at T-Mobile UK.
While there is apparently no formal sale process, the struggling fourth-placed network has been effectively put on the block by its German parent Deutsche Telekom if someone wants to make a reasonable offer.
Investment bankers at JP Morgan are trying to gauge interest in a potential sale of the business while considering other strategic options for it, including doing nothing.
Vodafone has already been linked with a possible offer, as has France Telecom’s Orange, although the latter has sought to distance itself from such talk.Now, under questioning, O2’s top executive has admitted the company could be considering a bid of its own.
Matthew Key (pictured), chairman and chief executive of O2 owner Telefónica Europe, told journalists he was “very happy” with its UK operation but that “clearly we are watching the T-Mobile situation with interest”.
He told The Guardian: “We are not definitely in and we are not definitely out. As market leader you would expect us to take a keen interest.”
He’s right. If long-awaited consolidation in the UK mobile is really about to happen, O2 will either want to have a say in it, or a good understanding of what is on offer. Some analysts think a bid by O2 is a long shot.
Aapo Markkanen at HIS Global Insight said: “Telefónica has been mentioned as one of the candidates to bid for Deutsche Telekom’s UK business, yet HIS considers any deal involving the two parties to be unlikely.
“More probable, then would be a takeover of Hansenet, Telecom Italia’s German broadband subsidiary. Telefónica already has a mobile business and a fixed-line unit with a strong presence in wholesale services, and a purchase of Hansenet would complement the footprint with a solid foothold in the retail fixed-line market.”
Key already knows T-Mobile is going through tough times and has been shedding ground to its rivals in the past 12 months.
But, having heard Vodafone has already been approached by JP Morgan, it’s little surprise he might be keen to have a peek at its books and learn more.
He may also want to push up the price Vodafone might have to pay if it made a bid by pretending to be more interested than he is.
A Vodafone acquisition of, or merger with, T-Mobile UK would give Vodafone more than 40 per cent UK mobile market share, easily overtaking O2, which has fought hard to win the top slot.
Scale is critical in mobile because if you have enough customers there comes a tipping point where every new one you put on the network becomes almost pure profit – in theory that is.
In practice, high subscriber acquisition costs put paid to that theory, but if the UK mobile market shrinks from five players to four those costs can be expected to fall as competition will be less ferocious.
A Vodafone/T-Mobile pairing remains completely hypothetical but if it were to happen the regulator could either block the deal, wave it through or, perhaps more likely, force the merged pairing to give up customers or spectrum to satisfy competition concerns.
O2 would want to be well placed if that were to happen – perhaps to pick up some of the extra assets – so it will do its homework now.
Asked whether O2 would take issue to one player having more than 40 per cent of the market, Key replied: “That’s a question for Ofcom in terms of how they would manage that sort of level of market share.”
It’s an unknown because the market has never been tested in this way.
Vodafone’s need to turn around its own UK business was underlined by its results in the first quarter. It lost 159,000 British customers in the three months ending June.
In contrast O2 UK put on 252,268 new customers in same period, while smaller rival Orange gained just 3,000.
Vodafone chief executive Vittorio Colao has made clear his admiration for the O2 UK business, as has Vodafone chairman Sir John Bond.
Speaking at Vodafone’s annual meeting last week, the banking veteran accepted that one of the reasons for O2’s success in the UK had “unquestionably” been its exclusive deal with Apple to sell the iPhone.
It is the deal that earned then-O2 UK chief Key promotion to his current position. The upbeat boss now says the new iPhone – the 3G S – has been selling “fantastically well.” His problem is the party may soon be over if rumours the exclusive deal will come to an end in September/November are true.
Meanwhile, Vodafone’s top brass have received their 12-monthly mauling by small shareholders over executive pay.
At the annual meeting several retail investors took issue with the remuneration report, which revealed former chief Arun Sarin left with £8.8 million in pay and bonuses for four months work last year, including £500,000 to help him relocate to the US.
One shareholder complained: “When I look up there [on the stage] I am looking at a bunch of very wealthy people. I am concerned about remuneration committees. They have brought this country to its knees.”
But for all the heat and invective, more than 95 per cent of shareholders voted in favour of the company’s remuneration policy. There was, however, genuine frustration expressed at the company’s share price, which has lost considerable ground this year and remains well below its all-time highs.
One investor put it: “We have been through chief executives like diarrhoea and we get, every year, a technological update which is not feeding through into your prime role of delivering a return for shareholders. It is always jam tomorrow. Should you not be yielding some shareholder delight instead of lumbering on like some behemoth?”
Now there’s an interesting series of images for you.
Article appears in Mobile News issue 445 (August 10, 2009).
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