Deutsche Telekom AG and France Telecom SA plan to merge their British mobile units, responding to intense competition with a venture that would grab top spot in the crowded UK market.
Setting out their plans on Tuesday, the partners said they plan to reach an agreement by the end of October and hope to get approval by mid 2010 for a combination of their British T-Mobile and Orange brands which could present a fresh challenge to market leaders O2 and Vodafone Plc.
Yet analysts said the two telecom groups could struggle to agree on one brand and strategy and questioned if forecast savings of more than 4 billion euros ($5.8 billion) were realistic. Regulators could also raise objections.
The British market with its five operators has long looked ripe for consolidation, but companies have been reluctant to make a move out of fear others would benefit while they focus on integration issues.
Now, the move by Deutsche Telekom and France Telecom could in the short term take pressure off O2 (part of Spain's Telefonica) and Vodafone, which have market shares of 27 percent and 25 percent respectively.
Orange has 22 percent followed by T-Mobile with 15 and Hutchison Whampoa's 3 UK with 8 percent.
Some analysts said the news was positive for France Telecom because it would shore up its position in the UK without spending cash, but less so for Deutsche Telekom, which had considered selling its struggling UK unit but according to analysts did not receive the offers it was looking for.
It's probably positive (for Deutsche Telekom) and better than doing nothing. But whether it is the best option is debatable, said analyst Lawrence Sugarman at ING.
Sanford Bernstein analyst Robin Bienenstock noted Deutsche Telekom could have used the cash from a disposal to invest in its U.S. business.
Shares in Deutsche Telekom and France Telecom both gained around 2 percent against a 1.5 percent rise in the DJ Stoxx European telecoms index .SXKP.
DELAY IN EXPECTED SYNERGIES?
Analysts were sceptical of forecast synergy savings of more than 4 billion euros from merging T-Mobile UK with Orange UK and also doubted company forecasts it would boost free cash flow from 2010 and earnings per share from 2011.
As (Deutsche Telekom) expects a regulatory approval by the end of H1 2010 and the incumbents have to agree on one brand and one strategy, we expect synergies to be delayed, Germany's WestLB bank said in a note, adding that total synergies could be lower than forecast.
The two companies said they will keep both brands for the first 18 months and then review the appropriate strategy.
If they don't cut one of the brands eventually, the synergies will be 1 billion lower than they say they will be, said Bienenstock. For me, the big question is will they bite the bullet and go down to one brand?
Tom Alexander, who will lead the newly merged company, said one solution might be to somehow marry the brands, with a slogan such as Orange powered by T-Mobile or vice-versa. We both have huge brand loyalty in the UK and spent a lot of money to build that up, he said. That won't be thrown away lightly.
Merck Finck analyst Theo Kitz also expressed concerns on future management control: We ... think that the joint management structure (no clear dominance of one partner) might slow down decision taking.
France Telecom's Chief Financial Officer Gervais Pellissier conceded this would not be easy.
We are not naive, said Pelissier on a conference call. There will be disagreements between the partners. But he said cooperation would be helped by the fact that the companies are not direct competitors in their home markets, and by delegating authority and decision-making power.
Another issue that may crop is regulation.
As any consolidation in the UK market will likely draw the attention of regulators, a deal could be blocked by Britain's competition regulator, which said in July it was happy with the state of competition in the market. [ID:nL8526265]
Analysts, however, noted some European operators hold 40 percent market shares and believe it will be approved.
(Additional reporting by Leila Abboud in Paris and Kate Holton in London; Editing by David Holmes)
($1=.6973 Euro) ($1=.6101 Pound)