Everyone knew that Deutsche Telecom AG (ETR:DTE, news, filings) was looking at alternatives for its TMobile UK operations, but I guess I didn't actually believe they would manage to make a deal. So yesterday's announcement of their intention to form a 50/50 joint venture with France Telecom (NYSE:FTE, news, filings) did manage to surprise me slightly. The new company, assuming it all happens as tentatively proposed, will have around 37% of the UK mobile market, leapfrogging both Telefonica's O2 and Vodafone in scale.
Deutsche Telekom will contribute its UK operations both cash and debt free, and to compensate for the size differential France Telecom will contribute its share laden with net debt of $1.25B. I haven't seen any word on what the new venture will be called, perhaps they haven't decided yet?
TMobile's problem in the UK has been lack of scale in a crowded marketplace. DT didn't really want to *leave*, but neither could it let things stand. This seems like an elegant solution, assuming the integration goes well of course.
And what next? Well, we all know how leapfrog is played - speculation is already mounting that one of the two will find an acquisition target in response - probably Hutchison Whampoa's numerically named unit "3". That won't get them above 37% of course, but that's probably out of reach anyway barring an O2/Vodafone deal that isn't likely to happen. Regardless, the UK seems to be heading for a big-3 structure in wireless, which hopefully will stabilize things.
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