The finite value of a T-Mobile UK merger
— Eric Auchard is a Reuters columnist. The opinions expressed are his own —
By Eric Auchard
The Financial Times, citing unnamed sources, says Deutsche Telekom is in “preliminary stage” talks with Vodafone, France Telecom, and Telefonica to sell T-Mobile UK.
The logic of such a deal seems to be compelling. DT needs to sell out because T-Mobile lacks the scale to gain an edge over its multiple competitors.
A combination would create substantial value, both for the buyer, and in terms of raising prices in what is one of Europe’s most competitive mobile markets. Sanford Bernstein estimates that it could create up to 6 billion euros of value for Vodafone and Telefonica’s O2, and up to 5 billion for FT’s Orange mobile unit.
But there’s a rub. Although the deal creates a lot of value for the winner, it’s also worth a lot just being a free-rider and benefiting from improved industry pricing that flows from consolidation. So the marginal advantage of winning shrinks. Unlike a conventional bid battle, where rivals try to thwart the other guy from stealing the prize, everyone is saying “after you, Didier” or “No please Julio, after you. I insist.”
Everyone may want the deal to happen without them.
For FT, Sanford estimates that the deal is worth about 2 billion euros in value creation, but 1.9 billion if it loses. Logically then, it should only be willing to pay an incremental 100 million euros to the estimated 3 billion standalone value of T-Mob, or 3.1 billion euros in all. At the high end, 02 could pay the most at around 3.9 billion euros, Bernstein calculates. That’s shy of Telekom’s 4 billion euro target.
What’s changed since May, when reports first surfaced that Deutsche Telekom was looking for a buyer? Not a lot, in terms of the complexities of making a deal work with any of the three big rivals.
But a source close to Deutsche Telekom said on Friday that the parent company put out calls to attract interest months ago and that the level of talks hasn’t progressed very far since then.
T-Mobile’s own customers represent 15 percent of the UK market. Virgin Mobile, which relies on T-Mobile networks, pushes its total share of the market over 20 percent. But it is by no means clear the government is prepared to see a dominant player emerge in the UK. Regulator Ofcom said in July it sees the competitive landscape of the market as “healthy.”
The context in which merger talks are happening is that Telekom is conducting a strategic review of whether to keep or sell T-Mobile UK. What the 4 billion euro asking price may represent is the benchmark at which T-Mobile decides it might as well push ahead on its own. Or just wishful thinking.
There’s another scenario to consider. The problem with any big-deal scenario is that scale alone won’t improve business conditions in the UK market. There is a spoiler involved in any polite effort to consolidate the mobile market — Hutchison’s 3, the fifth-ranked player in the market. Its pricing strategy has forced the other players to slash their own prices and until something changes with 3, conditions won’t improve.
Instead of being sold, T-Mobile UK, acting as a buyer of 3, would be a more effective way of curing what ails the UK mobile industry. This deal would be less risky than overpaying or staring down the regulatory gamble another big buyer would be taking.
— At the time of publication Eric Auchard did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund.—
You can find some of Eric’s previous columns here.
(Photo: Reuters/Stefan Wermuth)