Could 3 UK Merge With Or Buy T-Mobile UK?

German Telecoms giant Deutsche Telekom is apparently under huge pressure to merge or sell its UK mobile phone business, T-Mobile, to any one of the four mobile phone competitors on the market.

Marketingweek (and City AM) reported on Friday the 1st of May that the “The British market is highly competitive and has comparably low margins... In our view consolidation is a means to take excess capabilities out of the market. Nothing is unthinkable on our side.”

The company is set to announce a massive write down of around £1.6 billion for its mobile operations in the UK next week. This has angered its two main shareholders, the German government and US private equity group, Blackstone which will apparently push forward for T-Mobile to get rid of its UK arm.

The unthinkable would certainly include selling the business to any one of the top three networks (Orange, O2 and Vodafone). T-Mobile has failed to mount a significant competition to O2 and Vodafone, which have both reported profit margins of more than 25 percent.

The other (perhaps more preferable option) would be to merge with network partner 3. From September 2009, Three are apparently going to ditch Orange and O2 as their backup networks while keeping T-Mobile. Three and T-Mobile already had an agreemeent going back to December 2007 to combine their 3G base stations across the UK to save up to £2 billion till 2017.

The company issued a profit warning last week saying that its UK revenues were down by 21 percent year on year, caused partly by a dip of 3 percent in its customer user base. The company is said to be worth around £3.2 billion.

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Our Comments

UK is the only market in the Europe where you have five networks (and a number of smaller MVNO - Mobile Virtual Network operators like Tesco or Asda). This is why UK is the most competitive market and where customers can expect some of the best deals around. T-Mobile demise could mean that its 16 million or so customers (including those from Virgin Mobile) could be up for grabs.

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