|Deutsche Telekom & France Telecom Announce Plan to Merge UK Ops
IT News Online Staff
Deutsche Telekom and France Telecom have entered into exclusive negotiations to combine T-Mobile UK and Orange UK in a new 50:50 joint venture company. The new joint venture will create the UK's leading mobile operator.
The joint venture will have a combined mobile customer base of around 28.4 million, representing around 37% of UK mobile subscribers, based on figures at end December 2008. By integrating Orange's broadband activities, the joint venture will also have the capabilities to offer convergent solutions to its customers in the future. The business will have pro forma 2008 revenues of around €9.4 billion (£7.7 billion) and EBITDA of €2.1 billion (£1.7 billion).
This combination will bring substantial benefits to UK consumers. It will result in expanded network coverage and enhanced indoor and outdoor network quality for 2G and 3G services, as well as better customer proximity through a larger network of own shops and improved customer services. The combination will place the joint venture in a better position to invest in new services and to exploit new technologies. The new enlarged business will also be able to compete more effectively with the other two large mobile operators in the market.
Timotheus Höttges, CFO of Deutsche Telekom, said, "We will become market leader - our customers will benefit in many ways, for example from the best mobile broadband offer in Britain. 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. And, with our partnership, we have taken the most value enhancing strategy for Deutsche Telekom and its shareholders."
Gervais Pellissier, CFO of France Telecom, said, "By combining our operations in the UK, we anticipate the long-awaited consolidation in one of Europe's most competitive markets, thereby creating a well positioned player. This will reinforce fair competition and will provide strong benefits for our customers through improved coverage, quality of service and an 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."
The merger and integration of T-Mobile UK with Orange UK should generate estimated synergies with a net present value in excess of €4 billion (£3.5 billion). Estimated opex-based synergies should reach an annual run rate of over £445 million from 2014 onwards.
The key areas for the opex synergies of the joint venture are:
- Network and IT: Large-scale site rationalization leading to significant savings notably in site rental expenses, network operations and maintenance expenses
- Distribution and Marketing: Higher proportion of sales through own shops, resulting in lower distribution costs; a reduction in the combined number of stores and savings in marketing costs primarily post roll-out of a new branding strategy
- Other cost savings: Potential to reduce general and administration costs; eliminate duplication in core support functions; optimize the workforce notably in customer service, network and G&A operations
To achieve these opex synergies, the joint venture would expect to invest £600 to £800 million in integration costs over the period from 2010 to 2014. Those costs would primarily relate to the decommissioning of mobile sites, the rationalization of the network of retail stores and the streamlining of operations.
On the capex side, large scale savings are expected over the first five years following completion of the transaction, resulting from the integration and unification of the networks and from jointly expanding 3G coverage. The potential for capital expenditure savings, net of integration capex, is estimated at £620 million on a cumulative basis over 2010-2014, prior to stabilizing at around £100 million a year from 2015 onwards.
These benefits will result in significantly improved operational performance, with long term EBITDA margin expected to be superior to those of the current market leaders thanks to size effects and with capex efficiency expected to be best in class.
To create the new joint venture, Deutsche Telekom would contribute T-Mobile UK on a cash-free, debt-free basis, including T-Mobile UK's 50% holding in its 3G network joint venture with Hutchison and gross tax losses carried forward of at least £1.5 billion. France Telecom would 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 would 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 would have indebtedness of £1.25 billion, represented by two shareholder loans of £625 million held by each of Deutsche Telekom and France Telecom.
The Board of the new joint venture company will have balanced representation from Deutsche Telekom and France Telecom. The management team would be led by Tom Alexander, currently CEO of Orange UK, as CEO and Richard Moat, currently CEO of T-Mobile UK, as COO. The governance of the joint venture would attribute extensive operational decision-making to the management team.
The T-Mobile UK and Orange UK brands will be maintained separately for 18 months after completion of the transaction. During that period management will review branding alternatives for the joint venture and will develop a new branding strategy recommendation for shareholder approval.
This transaction is expected to create substantial value for both shareholders and to be accretive from 2010 in terms of free cash-flow per share and from 2011 in terms of earnings per share. Both Deutsche Telekom and France Telecom would recognize their respective interest in the joint venture using the equity method after closing. It is planned that the joint venture will distribute 90% of its free cash flow to its two shareholders.
Prior to the signing, which is expected to be end of October, both Deutsche Telekom and France Telecom will undertake confirmatory due diligence and will complete the definitive documentation. The final agreement is subject to the approval of the Supervisory Board of Deutsche Telekom and the Board of Directors of France Telecom, and the completion of an agreed transaction would be conditional on approval by the relevant competition authorities.