Is Orange and T-Mobile venture really as final as it looks?

So here it is. We have received “final confirmation” of the joint-venture that is to be launched in the UK between France Telecom and Deutsche Telekom - merging their UK operations Orange and T-Mobile. After months of speculation, the decision was initially announced in September, and the final seal has been stamped today.

What’s going on?

Basically, the UK just has too many mobile operators for the size of its market. There simply aren’t enough people to go around. T-Mobile was the fourth largest operator in the UK market, and that just wasn’t good enough to keep the company going. Starting at the end of 2008, T-Mobiles parent company (Germany’s Deutsche Telekom) started saying something had to be done.

In late April this year T-Mobile issued a “profit warning”, which caused two of DTs major shareholders (one of which was the German government) to put pressure on the telecoms firm to either sell the under-performing UK company or come up with a way to make it profitable.

By the start of September, T-Mobile was in talks with all of the Top Three operators in the UK - Orange, Vodafone and O2. The chances of a straight forward buy-out were slim - combining  the T-Mobile market share with any of the Top Three would have lead to a company so big that competition laws couldn’t allow it. So it was likely that a joint-venture was the solution. But with whom?

The answer came in late September: Orange. And today, Orange’s French parent company France Telecom has issued us the final confirmation of the JV:

“Deutsche Telekom and France Telecom today signed the final agreement to combine their UK operations, T-Mobile and Orange, into a 50:50 joint venture company.

Now that the confirmatory due diligence has been completed, this binding agreement confirms the terms of the transaction announced on 8 September 2009.

Completion is conditional upon approval by the relevant authorities and remains expected in the first half of 2010 as previously indicated.

The agreement is subject to the approval of the Supervisory Board of Deutsche Telekom and the Board of Directors of France Telecom.”

What we think?

There are some interesting questions left un-answered in the above release. Approval is still pending from “relevant authorities”… perhaps that’s because the wording of that announcement strongly implies that FT and DT are looking to create the megalithic structure that competition regulators are so afraid of. If a simple 50:50 venture combining all the existing UK assets of Orange and T-Mobile were to go ahead, the resulting company would own well over one third of the entire UK market. A rough breakdown looks like this:

1) T-Mobile/Orange 36.5%
2) O2 28%
3) Vodafone 25%

The wording of the France Telecom release sounds very finalistic - but I feel that there’s more to come before this venture can truly go ahead.