Summary
Whilst the UK has two more mobile networks than it needs the big three all know that they would be helping it's closest rivals in removing the two small players. If T-Mobile were to be sold to a rival the actions of the Regulator are not know at this time but some action is expected. The best case is that the new owner would be expected to return the 3G license and spectrum the worse is that both 2 & 3G spectrum is handed over. Has T-Mobile put the business up for sale? The present book value for the business is some €3B following the write down at the start of the year. Since that time T-Mobile has seen a decline in revenues in the UK and a loss of business caused by the fact that they have been working without a CEO or CMO and so have been following the German strategy. This has further lowered the value of the business.
Analysis
Since it's formation T-Mobile has been a minor player in the UK market. Whilst it has maintained a high profile thanks to some excellent advertising campaigns it has not been a commercial success. This can be seen by the fact that in has made a loss every year since its formation in 1993.
Since T-Mobile was bought by the German's the company has been under control from Germany. One of the first actions was the removal of the Strategy Group as the were seen as redundant now they were part of Deutsche Telekom. Over the last two years as the company has tried to maintain contact with the Big Three in the UK they have tried to do so on the basis of price rather than quality of the network or handset range. This has had the effect of lowering the quality of the customer base and can be seen by the fact that it has an ARPU almost half of that of Vodafone the market leader in terms of income if not size in the UK. When you look at the subscriber base you also see that over a third of T-Mobile's customers are as a result of the MVNO agreement with Virgin. The agreement with 3 over Radio Network share has enabled T-Mobile to meet the terms of its license without having to overspend on Equipment.
The poor management of the UK by T-Mobile International have seen the asset lose value year on year. This decline has not been fully reflected in the accounts and so a Sale would require an additional write down. With the current debt level in the group is this something that it can afford?
Looking at the three potential buyers; Vodafone has to be the least likely. It currently has an excellent network in terms of coverage, speed and quality and its customers spend more than any other in the UK. Thus why would they seeking to lower al the metrics on which they are judged by swapping the Turkish network for T-Mobile UK or worse pay cash? For them the only value could be the £1.5B tax loss.
Orange as the smallest of the big three could be considered a suitor prepared to pay cash for the asset. However the cash price is likely to be a lot lower than the book price and so why would such a transaction take place? Whilst Orange's parent has cash I don't think its burning a hole in there pocket and so a purchase is unlikely.
O2 might be prepared to buy T-Mobile to maintain its place as leader in the UK. It's Spanish parent could afford the price and might be able to use one of the smaller European assets as a swap rather than cash. The problem is that as the number one in the UK the regulator is likely to take back spectrum and so the transaction will add pressure on the infrastructure already in place and this might stop any transaction.
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
