T-Mobile Netherlands is buying Tele2 NL in order to create a strong number-three in the Dutch market to go up against the vertically integrated market leaders KPN and VodafoneZiggo. The merger is not unexpected. A window has opened in the terms of spectrum licences and Tele2 has not succeeded five years after launching its own mobile network to break even at the EBITDA level, let alone in terms of cash flow. Noting the huge market share of the 'duopoly' of KPN and VodafoneZiggo, also in terms of profit, T-Mobile has suggested it won't shy from using prices to escalate the level of competition.
T-Mobile expects it will take a year to obtain clearance from the European Commission for the merger. CEO Soren Abildgaard told Telecompaper that the company's focus is on creating value with the new company. The group expects cost synergies of EUR 150 million per year within three years of closing the deal. Expected revenue synergies were not quantified.
T-Mobile embraces FMC in saturated market
The transaction is structured as a joint venture, with 75 percent for Deutsche Telekom and 25 percent for Tele2 Group, but one could better call it a takeover by DT. The company name will remain T-Mobile, but the Tele2 brand will still be used. The 'new' T-Mobile will be a stronger number three on the mobile market, but it still lacks scale on the fixed market, where it doesn't have its own network. Whereas T-Mobile previously took a mobile-only focus, it's now chosen to follow the market leaders with a multi-play offering and FMC (fixed-mobile convergence). Important to note that T-Mobile and Tele2 already offer fixed services, but not with the same emphasis as the two bigger players.
The new approach will not be simple. KPN and VodafoneZiggo have started earlier, have their own fixed and mobile networks, and offer extensive portfolios with a range of benefits for customers who take both fixed and mobile service. Furthermore, the telecom market is saturated, with churn declining due to the shift to FMC subscriptions. It remains very difficult to differentiate on this market.
Nevertheless, T-Mobile sees room to shake up the market. The two market leaders account for 80 percent of the EBITDA and 90 percent of the cash flow on the market, noted Abildgaard. T-Mobile wants to make a frontal attack on KPN and VodafoneZiggo (which is already copying KPN). Their strategies are based on long-term lock-in with customers and annual price increases. In this sense, Abildgaard implied price could be an effective weapon. The expected cost synergies should create room to innovate, maintain networks and offer price advantages to customers. The simplest approach would be to offer multi-play customers a discount of EUR 5 per month, the same as KPN and VodafoneZiggo do.
Policy shift
Still, it's not certain the deal will receive regulatory approval. Consolidation from four to three mobile networks has been an issue for the European Commission. For the Netherlands, it would mean a setback for the government's policy, which helped create the conditions for Tele2 to obtain spectrum in 2012 and become the fourth operator.
Five years later, the company has still not shown it can turn a profit. And that's even with a number of supporting factors: Tele2 already had a customer base as MVNO, it agreed to share networks with T-Mobile and was not burdened by any legacy investments as it only invested in 4G.
Whatever the case, some resistance from the The Hague can be expected.
The policy failure can also be attributed to Tele2. The company also thought there was room for a fourth mobile operator and stuck its hand out for the fourth mobile licence. Despite changing management several times since, Tele2 was unable to develop the right strategy. There may very well be space for a fourth operator in the Netherlands, but the Tele2 management unfortunately failed in this.
The Dutch market has seen some significant changes in recent years: in addition to the merger of UPC and Ziggo and then Ziggo and Vodafone, we've seen the rise of the multi-play and convergence of fixed and mobile subscriptions. This raises the chances that the government (the EC) will follow the route of Austria, Italy and Ireland and allow the merger to go ahead, rather than blocking it, like in the UK and Denmark.
