Deutsche Telekom, owner of T-Mobile, and France Telecom, owner of Orange, said that they have entered into "exclusive negotiations" to combine the two firms in a 50:50 joint venture.
The new entity will gain an overnight lead in the highly competitive UK mobile operator market with a share of around 37 per cent, representing 28 million customers. Deutsche Telekom and France Telecom said that the deal will benefit customers by providing better coverage and a wider network of stores.
The proposed deal will be bad news for rivals O2 and Vodafone, which currently rank first and second in the UK with market shares of around 27 per cent and 25 per cent respectively, although it is still subject to potential scrutiny by telecoms regulators.
"We will become market leader, and our customers will benefit in many ways, for example from the best mobile broadband offer in Britain," said Timotheus Höttges, chief financial officer at Deutsche Telekom.
"In the second biggest market in Europe, which is undoubtedly one of the toughest and most competitive, we are giving T-Mobile UK a clear and strong future."
Gervais Pellissier, chief financial officer at France Telecom, claimed that the deal will give the combined firm "enhanced capacity to develop new services and technologies".
"Our shareholders will benefit from higher profitability and an immediate cash flow per share accretion without impacting the overall indebtedness of the parent companies," he added.
Emeka Obiodu, a senior analyst at Ovum, believes that the deal is likely to be approved by regulators, but with the proviso that T-Mobile hands over the wholesale deal it has with Virgin Mobile, and maintains its network sharing deal with 3.
"If that deal [with 3] is allowed to unravel, 3 will be cast adrift unless Vodafone or O2 decides to buy it," he said.
Obiodu agreed that a combined Orange and T-Mobile would offer customers the best of both companies, but warned that any lead in the market could be short lived if the merger is not handled correctly.
"The devil is in the detail over how they manage the integration," he explained. "If they execute well it will be good for them, but if they don't it won't be long before their market share is eroded."
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