Mobile phone operator Vodafone is mulling a bid of about £3bn for smaller rival T-Mobile UK, according to today’s papers – a deal that would create the UK’s largest operator, with a market share of about 40%. T-Mobile’s German owner Deutsche Telekom apparently wants out of the unprofitable UK market, while Vodafone is looking to find more economies of scale to boost its margins. And since Vodafone CEO Vittorio Colao has been talking recently about his willingness to play a role in industry consolidation (like it recently did in Australia), it wouldn’t be a big shock. But the mobile industry’s regulators are likely to have a few hang-ups...
The deal would certainly make sense for both sides. T-Mobile hasn’t made money for years, so you couldn’t blame Deutsche Telekom if it decided to wash its hands of the UK market and concentrate on higher-margin divisions elsewhere. The UK is a tough place for mobile phone companies to make money: it’s the only major European market with five big operators, which puts the squeeze on margins. Vodafone, on the other hand, thinks more consolidation is the answer, judging by Colao’s recent statements. Over in Australia, it recently merged its mobile division with that of Hutchison Whampoa, and the commercial logic is presumably similar for the UK.
However, what’s good for Vodafone is not necessarily good for the rest of us. It already has a 25% market share; adding T-Mobile’s 15% would give it 40%, which would be well ahead of the current market leader O2 (which has 27%). This is bound to alert the attention of regulators. The current level of competition might be bad for margins, but it’s good for customers because it pushes prices down – Vodafone’s rivals will presumably argue that creating such a large entity would have exactly the opposite effect. And as well as circumventing all the usual competition law, it will also have to get industry watchdog Ofcom to sign the deal off. So it won’t be easy.
On the other hand, precedents do exist. As well as Australia, the other big European markets – notably France, Italy and Spain – have all allowed a single company to build up this kind of market share. So it’s possible that UK regulators will take their lead from their European counterparts – or at least, Vodafone might well have legal recourse if they don’t.
Both sides are keeping quiet on the proposed deal so far (although they’re not denying it, which presumably tells us something), although the news has pushed up both of their share prices this morning. But Vodafone is going to have to jump through an awful lot of regulatory hoops for this deal to have any chance of succeeding…
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