Improve your contact center performance. See how you can make a difference.
Watch Now
Engage and build your ICT audience with CIOL online advertising.
Know more
LONDON, UK: Consolidation within the crowded British mobile market is desperately needed but any acquirer runs the risk of overpaying and watching the benefits be shared among its rivals.
Analysts and executives have long said that the British market, with five operators, is the most competitive in Europe and consolidation is the best way to address ever-reducing margins.
"Everyone agrees consolidation is needed and seemingly T-Mobile will fall first," said Emeka Obiodu, senior analyst at industry research group Ovum.
Deutsche Telekom is currently deciding whether to sell its underperforming T-Mobile UK unit although a decision is not expected imminently, a person familiar with the situation said earlier this week.
Deutsche is not in a hurry to sell, however, and would expect a premium, even though the unit is hard to value because of uncertainty about how well it can hold on to its customers.
"Can (a buyer) be certain that it will have T-Mobile's entire customer base when a deal is completed? Or will it pay for a vanishing customer base?" Obiodu said.
Any sale of T-Mobile UK to one of the three big operators would also likely spur a sale of the fifth operator 3, owned by Hutchison Whampoa, which would benefit all remaining operators by reducing competition and improving profit margins.
Vodafone has seen margins in the UK shrink to around 22 percent from around 33 percent three years ago, while T-Mobile UK's margin has declined to 15 percent in that time.
Yet, while rumours abound over who will make a move on T-Mobile UK, operators are reluctant to do so "because the player buying T-Mobile UK would pay the bill for intra-market consolidation and everyone else would benefit", Jochen Reichert at SES Research said.
With that in mind, it is not clear which of the three big operators -- leader O2 from Telefonica, Vodafone and France Telecom's Orange -- would take the risk.
T-Mobile has put out feelers to the operators to gauge their reaction, people familiar with the situation have said.
"We would be happy with consolidation, like the others," France Telecom financial head Gervais Pellissier told Reuters in May.
"But the risk is the one who pays may not be the one who gets the proceeds," said Pellissier, who said France Telecom's Orange would not make an offer because they could not guarantee keeping hold of the customers.
But that would not necessarily rule out Orange as a joint venture partner.
Timing Not Right?
Most analysts also believe the new management at T-Mobile UK should be given the time to introduce changes, such as reducing staff numbers and promoting its offers of SIM-card only deals for the lower end of the market.
Offering a SIM-only contract means the consumer does not have to pay within the contract for the price of a new handset and it has proved popular with users in the economic downturn.
Daiwa analyst Michael Kovacocy said an acquisition of T-Mobile would act as "damage control" by removing a competitor, but said the timing was not right for T-Mobile.
He also said the high cost of third-party distribution in Britain would not change with operator consolidation.
"Selling out now would not make sense," Kovacocy said. "They could wait until they're through the Christmas season.
"If there is a second half uplift in the economy, and if they get some rebound in the prepaid market they could improve the valuation, the business and get their margins up. And the people who would buy it are still going to be there."
Some are more sceptical, arguing that T-Mobile UK has no chance of a turnaround because it has too many problems.
Deutsche Telekom entered the British market in 1999 when it acquired One 2 One, and launched the T-Mobile UK brand in 2002.
T-Mobile grew steadily in the UK but started to lose customers in the second quarter of 2008 as it failed to keep up with new deals and handsets offered by rivals. It took a hit with an impairment writedown of 1.8 billion euros in the first quarter.
Vodafone, the world's largest mobile group by revenue, was reported by the Financial Times to be considering a bid, although the British group has declined to comment.
But the deal would push Vodafone ahead of O2 in market share and attract the attention of regulators, who could let it through with some adjustments such as the sale of spectrum.
"Despite the potential strategic advantages, this is not a case of a square peg in a square hole," said Ovum's Obiodu, citing the fact that both companies had suffered revenue declines in recent quarters.
Sharifah Amirah at Frost & Sullivan said she would rather see O2 buy T-Mobile because it would be a better fit.
O2 has reaped the benefits in the last year from securing the exclusive contract to sell the Apple iPhone and from also pushing the SIM-only service.
