T-Mobile Orange merger unlikely to phase rivals

T-Mobile and Orange will have their hands full combining operations

The proposed merger of T-Mobile and Orange could be good news for business customers of both operators, but is unlikely to cause rivals Vodafone and O2 too many sleepless nights as they will have the opportunity to make hay while the new partners undergo the difficult process of integration, according to industry experts.

Speaking on the day of the announcement, parent companies Deutsche Telekom (T-Mobile) and France Telecom (Orange) were understandably bullish about the potential cost savings and improved services that the deal could produce.

"This joint venture has and will have the best and largest network providing enhanced coverage quality indoors and in rural areas, the largest distribution network, the scale and resources to invest and the highest quality and most innovative services in the British market," said Deutsche Telekom chief financial officer Timotheus Höttges.

The companies claimed that the integration would generate synergies with a net value of around £3.5bn, mainly through combining networks, marketing and distribution as well as customer service overheads.

By way of example, T-Mobile UK managing director Richard Moat explained that the new venture would need 20 per cent fewer base stations and 35 per cent fewer sites.

However, the current terms of the deal could be changed depending on the extent to which regulators get involved, according to Ovum senior analyst Emeka Obiodu, as the new firm would jump into pole position in the UK market with a share of 37 per cent.

"There is no way that a deal of this size will go through without regulators dissecting it and trying to uphold value for the consumer," said Obiodu. "They could ask T-Mobile to hand over the wholesale deal it has with Virgin Mobile, and they could insist that it maintains its network sharing deal with 3."

Obiodu maintained that 3 could be snapped up by Vodafone or O2 if it is " cast adrift" by T-Mobile, as its rivals look to claw back market share from the newly formed company.

However, if the integration is managed well, the merged T-Mobile and Orange could be good news for customers, who will benefit from Orange's strength in the fixed broadband space and T-Mobile's strong position in the mobile broadband space.

Gartner analyst Katja Ruud agreed that customers of both companies are likely to be better off after the deal.

"Usually, when talking about market consolidation, we say that price decreases will have to stop, but in this case there are still four providers and one of them, 3, tends to be price leading rather than following," she argued.

"Also T-Mobile and Orange business customers have voiced their frustrations in the past, so if their network assets can be strengthened it could be good for them as long as it doesn't come at a cost of increased prices."

Ruud also argued that O2 and Vodafone, which now slip into second and third places respectively in the market, will not be overly concerned about their powerful new rival.

Any merger between T-Mobile and Orange will take significant time and resources, allowing the two operators to "go ahead and expand their portfolios" , she said.

"I think they will see it as an opportunity for them, and it certainly can be," Ruud added. "Some customers may even fall between the cracks and, if they are about to go into contract negotiations with [T-Mobile or Orange], they may well choose to step out and go with one of the two competitors instead."

Moat admitted that the integration would be a major undertaking, pointing to "significant integration costs" related to lease termination penalties and supplier contract termination, among other practical undertakings necessary to complete the merger.