Deutsche Telekom and France Telecom have agreed to merge their UK mobile operations in a 50-50 joint venture. The move will create the UK's largest mobile operator, with 28.4 million customers and 37 percent of the market, based on end-2008 figures. The combination is expected to lead to better network coverage, a broader distribution network and a stronger competitive position versus the previous market leaders Vodafone and O2. Synergies from the deal are estimated at over GBP 3.5 billion, with annual operating cost savings of GBP 445 million from 2014. To achieve these synergies, the joint venture expects extra costs of GBP 600-800 million over the period 2010-14, for integration work such as decommissioning mobile sites, rationalising the network of retail stores and workforce reductions. Capex savings are estimated at GBP 620 million over the period 2010-14, plus GBP 100 million per year thereafter. Orange UK CEO Tom Alexander will head up the new venture, while T-Mobile UK CEO Richard Moat will act as COO. The T-Mobile UK and Orange UK brands will continue for another 18 months, after which the venture will consider a new name for the company.
To create the new joint venture, Deutsche Telekom will contribute T-Mobile UK on a cash-free, debt-free basis, including T-Mobile UK's 50 percent holding in its 3G network joint venture with 3 UK and gross tax losses carried forward of at least GBP 1.5 billion. France Telecom will contribute the whole of Orange UK Mobile including GBP 1.25 billion of intra-group net debt in order to equalize the value of the contributions to the joint venture. After closing, Deutsche Telekom will grant a GBP 625 million shareholder loan to the joint venture, which will be used to simultaneously reimburse GBP 625 million in debt to France Telecom. As a result, the joint venture will have debt of GBP 1.25 billion, represented by two shareholder loans of GBP 625 million held by Deutsche Telekom and France Telecom. The business had pro forma 2008 revenues of GBP 7.7 billion and EBITDA of GBP 1.7 billion. The companies expect the deal to add to free cash flow from 2010 and to EPS from 2011, with 90 percent of the free cash flow going back to shareholders. The final deal remains subject to due diligence and management approval at both companies, as well as clearance by competition authorities.
