Deutsche Telekom’s T-Mobile and France Telecom’s Orange have agreed to merge their UK operations in a 50/50 joint venture that will create a new UK market leader. In a statement citing Ofcom statistics, Orange and T-Mobile – currently the third- and fourth-largest mobile operators in the UK, respectively – said that the combined business would have 28.4 million customers, giving it an approximate 37 percent market share, pushing current market-leader Telefonica O2 into second place (on 28 percent) and Vodafone into third (23 percent). Both O2 and Vodafone had reportedly also been in talks to acquire T-Mobile UK, which has been at the heart of M&A speculation in recent months after Deutsche Telekom said in June it was exploring its options at the unit. The deal is subject to due dilligence and regulatory approvals. However, it is thought that the UK’s anti-trust regulators will look more favourably on a merger between T-Mobile and Orange than a takeover of T-Mobile by one of the two larger players, which would have created an operator that controlled over 40 percent of the market. The deal will reduce the number of mobile network operators in the UK market to four, which will bring it in line with most other comparable European markets. 3 UK remains the country’s smallest network with an estimated 5.8 percent market share, while Virgin Mobile UK – an MVNO that uses T-Mobile’s network – is also a major player with an estimated 6.2 percent share.

Orange and T-Mobile said the merged business will have pro forma 2008 revenues of approximately EUR9.4 billion (£7.7 billion) and EBITDA of EUR2.1 billion (£1.7 billion). 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 Hutchison and gross tax losses carried forward of at least £1.5 billion. France Telecom will contribute the whole of Orange UK including £1.25 billion of intra-group net debt in order to equalize the value of the contributions to the joint venture. Immediately after closing Deutsche Telekom will grant a £625 million shareholder loan to the joint venture, which would be used to simultaneously reimburse £625 million to France Telecom. As a result, the joint venture will have indebtedness of £1.25 billion, represented by two shareholder loans of £625 million held by each of Deutsche Telekom and France Telecom. The operators said the merger will create net opex and capex savings in excess of £3.5 billion. Estimated opex-based synergies are forecast to reach an annual run rate of over £445 million from 2014 onwards, while capex savings are estimated at £620 million on a cumulative basis over 2010-2014, prior to stabilising at approximately £100 million a year from 2015 onwards. The operators noted in an official announcement presentation that savings are also likely to be made via “optimisation of the workforce” but no details on headcount reductions were given. Integration is expected to take 18 months following approval of the deal by the authorities and will cost around £600 million and £800 million. Both operators’ brands will be maintained for this period with a new brand strategy scheduled to be introduced in the first half of 2012. The management team of the company will be led by Tom Alexander, currently CEO of Orange UK, as CEO, and Richard Moat, currently CEO of T-Mobile UK, as COO.