Business Watch: Heavenly match or waking nightmare?


Back in 2003, when he was chief executive of Virgin Mobile, Tom Alexander (pictured left, with T-Mobile UK MD Richard Moat) was locked in a long-running, very public and very bitter legal row with T-Mobile UK.

Now it looks like he’s going to be running the company.

Few would have thought it back then, and even fewer would have envisaged that Alexander would also be running T-Mobile UK alongside Orange UK, where he’s now chief executive.

But that’s exactly what’s going to happen if Deutsche Telekom and France Telecom can agree the finer details of jaw-dropping plans to merge their British mobile units.

This is not a done deal yet, but Deutsche Telekom has made its intentions clear by rejecting the two bids for T-Mobile UK made by Vodafone and O2 – which valued the company at about £4 billion – as being too low.

The German giant thinks it can extract greater value by pooling its UK assets with those of Orange, in a 50:50 joint venture.

The venture will overtake both top-placed O2 and second-placed Vodafone to become number one by size in Europe’s most competitive mobile market.

More on the implications for Vodafone, O2 and 3 later, but first, while there are a host of reasons why this deal makes great strategic sense, there are also many unanswered questions and several reasons why it could yet turn into a waking nightmare for Alexander and his team.

Firstly, it’s not even clear that the regulator will allow the merger to go ahead, at least without some concessions from the combined group to ensure that their respective customers are protected.

As it stands, both parties expect to get the nod from the watchdogs in the first half of 2010 and for what it’s worth I reckon they’ll get it, albeit with some conditions attached that could make the deal less attractive for them.

But analysts at Enders Analysis are not so sure. “While the combined market share (37 per cent) is less than would have resulted from an O2/T-Mobile or Vodafone/T-Mobile merger, it is still substantial, and certainly warrants a full investigation, and may result in an outright refusal.

“In essence the argument is that fewer mobile operators would result in less product and cost innovation, which would result in worse offers and/or higher prices than would otherwise be the case (which is better for the operators, but worse for consumers).”

Enders posits the possibility that T-Mobile might have to sell spectrum or give its lucrative wholesale deal with former joint venture partner Virgin Mobile as one possible condition. We shall see.

Assuming Alexander can get the competition regulator’s blessing, he will have a deal that boasts some impeccable strategic logic.


For a start, there is simply too much competition in UK mobile so taking out one of the five network operators will be good news for everyone.
A combined Orange/T-Mobile will also have a much stronger investment case for 4G when the time comes for it to buy new spectrum.

As Emeka Obiodu of Ovum also points out: “Orange’s fixed broadband assets are also included in the deal, so the combination would enable T-Mobile customers to receive integrated offering.

For T-Mobile the lack of a fixed strategy was leaving it somewhat exposed to future trends in the UK.”

But more important than any of those benefits, of course, are the cost savings. These are likely to be very big given the level of duplication across both companies in terms of network, marketing and administrative functions.

The companies have announced planned synergies of £445 million in operating costs and £100 million in capital expenditure, to be ongoing from 2014/2015 respectively, with a net present value of more than £3.5 billion.

Analysts are divided on how achievable these figures are but no one is any doubt that it is going to involve serious job cuts. The industry estimates that around 1,000 jobs will go but Alexander is not saying anything.

Neither is he saying how many of the combined group’s 613 shops will be closed – although analysts put the figure at around 120.

What Alexander does know is that he will have two very exacting shareholders to answer to: in the form of former state-owned monopolies France Telecom and Deutsche Telekom.

He will also be well aware that telecoms joint ventures have a rich history of failure, not least because there is no casting vote in the boardroom and arguments are therefore hard to resolve.

Full article appears in Mobile News issue 448. To subscribe to Mobile News, click here