T-Mobile UK: Why a Sale Makes Sense

July 6, 2009

The past 12 months have seen T-Mobile’s performance in the UK market deteriorate, leading investors to increase pressure on managers to sell the UK business. T-Mobile’s subscriptions have slipped from a high of 17.3m in 2007 to 16.8m by the end of 2008, with further losses predicted through 2010. Meanwhile, operators such as Telefónica O2 and Three UK — the latter shares T-Mobile’s network — have consistently increased their market shares (see exhibit).

Considering that the UK is Europe’s most competitive mobile market, with five international powerhouses competing for subscribers, a market consolidation seems inevitable. Rumors of T-Mobile’s acquisition by Vodafone emerged last Monday, and the market has been awash with talk of bids for the struggling operator. Telefónica O2 has expressed interest in acquiring T-Mobile’s operations, while France Telecom is examining the feasibility of a joint venture with its Orange brand. Deutsche Telekom stated that it would prefer an asset swap for its UK business, hinting at the possibility of snapping up Vodafone’s ailing Turkish operations.

The news comes at a critical time in the UK regulatory cycle, with Ofcom nearing its decision on how to refarm the available mobile spectrum. The possibility of a T-Mobile acquisition by either Vodafone or Telefónica O2 would likely derail the government’s latest plans for spectrum refarming (see our latest Insider, Spectrum Refarming for 3G). T-Mobile and Orange strongly advocate the breakup of Telefónica O2 and Vodafone’s exclusivity in the 900MHz spectrum. With T-Mobile at risk of falling into the hands of Vodafone, the future division of the 900MHz and 1800MHz bands now seems uncertain.

Talks of a sell-off have long plagued Deutsche Telekom’s UK operations, with the firm’s management staving off investors’ call for a sale as late as this past May. T-Mobile’s managers have urged its shareholders to adopt a long-term view of its operations in the UK. Given the economic climate and investor sentiment toward long-term performance, it comes as no surprise that the firm’s shareholders have renewed their calls for a divestment of the UK operations.

T-Mobile has stated that it expects a minimum of €3bn for its operations, however, a bidding war between Vodafone and Telefónica could push that figure even higher. The opportunity seems extremely tempting for Vodafone, which has seen its market share slip to second place behind Telefónica O2. A tie-up between T-Mobile UK and Vodafone, pending approval by national and European regulators, would see Vodafone pull ahead of Telefónica O2 with a market share of more than 45% in 2009.

Despite the onslaught of news surrounding the possibility of a sale, Deutsche Telekom has the benefit of time on its side. Although investors have voiced their disappointment with the firm’s UK operations, the firm still remains well-capitalized and financially stable. As such, both investors and managers are positioned to hold out for a more favorable offer.

— Andrei Tchadliev, Analyst, EMEA

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