Orange and T-Mobile are to merge, creating the UK's largest mobile phone operator.
Mergers and acquisitions do seem to be back with us, after Kraft's recent bold bid for Cadbury (LSE: CBRY). Now it's the turn of France Telecom and Deutsche Telekom, who announced on Tuesday that they are planning to merge their respective mobile phone operations, Orange and T-Mobile, and spin them off as a separate company. The new company, with its 37% market share, would be catapulted to the top of the UK mobile phone league, ahead of Telefonica's O2 with 27%, and Vodafone (LSE: VOD) on 25%.
We've known something was on the cards regarding T-Mobile since Deutsche Telekom issued a profit warning in April, largely due to its poor performance in the UK, and announced that it was considering all options for the future of T-Mobile.
Most observers took that to mean a straight sell-off, but the planned merger does have the advantage of avoiding the large write-down that such a sale would inevitably entail. The merger alone won't solve T-Mobile's profitability problems, though, as merging two businesses that are showing different levels of success would still leave them with the same average level of profitability.
Merger plans
The secret of success, if success there is to be, will depend on how well the new company merges its branding, its network, and its customer base. The plan is currently for the two brands to be kept separate for 18 months, while the new management team work on a new branding strategy. With Orange being such a powerful brand in the UK, and T-Mobile not inspiring anything like the same familiarity (how many T-Mobile ads or slogans can you remember?), it would probably be madness if the whole thing does not end up as Orange.
Talking of the new management team, the company will be headed up by current Orange chief executive Tom Alexander, with T-Mobile's UK boss Richard Moat fulfilling the chief operating office role. Orange currently employs 12,500 people in the UK, and T-Mobile 6,500. Although there is much talk of cost savings to be made, there has been no mention of staffing levels so far, but with other telecoms companies having lost staff to save money over the past couple of years, there must be some concern there.
Savings
Although the merger is expected to cost between £600m and £800m, total cost savings of around £3.5bn are expected, which will come from reductions in duplicated facilities. Some phone masts will be decommissioned, and retail stores and other operations will be merged. One of the results should be increased coverage for existing Orange and T-Mobile customers (although the phone companies do already share some network access).
Of course, with no telecoms operator controlling more than a third of any individual EU mobile phone market prior to this, the telecoms regulators will be keen to cast an eye over the proposal. They may be concerned that if it goes ahead, the top three operators in the UK would control over 90% of the market.
But hopefully they'll clear the deal, because consolidation in the market is needed, and is inevitable in the long run. The early days when individual mobile phone operators could offer genuine competitive advantages are long gone, and today the mature market is very much commoditised, with competition being based on little more than marketing and price. And in the UK, there really isn't the brand space to support four primary mobile telecoms providers (a situation that is exacerbated by the addition of secondary providers, operating over the networks of the big four).
What does it mean?
What does it mean for investors? If Orange/T-Mobile succeeds in cutting costs according to plan, we should probably expect to see some market-beating mobile phone deals being offered in the next year or two, and that will put pressure on the competition's margins as they will be obliged to follow suit to match them.
However, that has to be seen in its wider context. Although the number of operators in the UK will be cut by one, the ownership of Europe's telecoms brands is effectively still in the same hands. The future of mobile telecommunications is worldwide, and that's what investors in telecoms need to keep in mind. I can still see plenty of opportunity to profit from mobile telecoms investing for a good while to come, providing we treat the industry as we would any other commoditised one and invest in the biggest and most efficient operators, concentrating on those with policies of handing back nice dividends to their owners.
More from Alan Oscroft:
> Alan owns shares in Vodafone.
