Desperately Seeking Scale, Orange & T-Mobile Merge in UK

orangeOrange will merge with T-Mobile UK in a deal that will see the combined company become the largest player in the UK, with 28.4 million customers and a 37 percent market share. And it likely foreshadows more consolidation as the ultra-competitive wireless market moves from 2G to 3G and beyond, forcing operators to invest heavily in upgrading their networks in order to compete.
The move is all about cutting costs in an effort to better compete with O2 and Vodafone, which have 27 and 25 percent of the UK wireless market, respectively. The merging operators said they plan to spend between $992 million and $1.32 billion over the next five years to integrate their operations, resulting in an annual savings of $736 million or so. The carriers plan to shutter 120 retail locations and eliminate duplicated departments as they consolidate their networks into a single infrastructure supporting both 2G and 3G technologies.
But the deal also gives T-Mobile a much-needed stake in the fixed-mobile convergence game, leaving 3 UK as the only mobile carrier in the market without a fixed-line offering. That not only gives the joint venture — which won’t be named until the integration is complete — a wired broadband product for end users, it also provides a way to offload traffic from mobile to fixed networks via femtocells or Unlicensed Mobile Access (UMA). And the alliance may provide the leverage necessary for the carriers to offer the iPhone (s aapl), which current UK market leader O2 is expected to lose its exclusive grip on next month.
The merger will need to overcome a number of regulatory hurdles and some stringent requirements could be attached, Analysys Mason notes. But if the deal is allowed to go through — and most onlookers seem to believe it will be approved — it will change the UK mobile landscape dramatically. And while authorities would be unlikely to allow a subsequent merger of either O2 or Vodafone (s vod) with a major player, it could spark a bidding war for 3 UK and its 8 percent market share as the battle for scale steps up.