Deutsche Telekom and France Telecom are planning to merge T-Mobile UK and Orange UK. The companies have entered into exclusive negotiations to combine T-Mobile and Orange in a new 50:50 joint venture company.

If the negotiations are successfully accomplished (the deal is expected to be completed by the end of October), the new joint venture will create the UK’s leading mobile operator. It will have a combined mobile customer base of around 28 million, representing approximately 37 percent of UK mobile subscribers.

The companies assure that this combination will result in expanded network coverage and better customer proximity through a larger network of own shops.

Obviously, the other aim of the new enlarged business is to compete more effectively with the other two large UK operators – O2 and Vodafone.

“By combining our operations in the UK, we anticipate the long-awaited consolidation in one of Europe’s most competitive markets. This will reinforce fair competition and will provide strong benefits for our customers through improved coverage, quality of service and an enhanced capacity to develop new services and technologies,” said Gervais Pellissier, CFO of France Telecom.

“Our shareholders will benefit from higher profitability and an immediate cash flow per share accretion without impacting the overall indebtedness of the parent companies.”

The business will have pro forma 2008 revenues of approximately £7.7 billion. The merger and integration of the operators should generate estimated synergies with a net present value in excess of £3.5 billion, as the companies claim.

Estimated opex-based synergies should reach an annual run rate of over £445 million from 2014 onwards.

The operators predict that the key areas for the opex synergies of the joint venture will be network & IT – large-scale site rationalisation leading to savings notably in site rental expenses, network operations and maintenance expenses – and distribution and marketing – higher proportion of sales through own shops, resulting in lower distribution costs and savings in marketing costs primarily post roll-out of a new branding strategy.

“We will become market leader,” stated Timotheus Höttges, CFO of Deutsche Telekom.

“Our customers will benefit in many ways, for example from the best mobile broadband offer in Britain. In the second-biggest market in Europe, which is undoubtedly one of the toughest and most competitive, we are giving T-Mobile UK a clear and strong future.”

The joint venture expects to invest £600 to £800 million in integration costs over the period from 2010 to 2014. Those costs would primarily relate to the decommissioning of mobile sites, the rationalisation of the network of retail stores and the streamlining of operations.

The Board of the new joint venture company will have balanced representation from both firms. The management team would be led by Tom Alexander, currently CEO of Orange UK, as CEO and Richard Moat, currently CEO of TMobile UK, as COO.

The T-Mobile UK and Orange UK brands will be maintained separately for 18 months after completion of the transaction.

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