German telecom carrier Deutsche Telekom (DT) and France Telecom (FTE) are finally merging their UK operations in a 50-50 joint venture. The companies reportedly initiated negotiations yesterday and an agreement is likely to be signed by the end of October. If the deal is finalized, Deutsche Telekom’s British subsidiary T-mobile UK will combine with France Telecom’s Orange UK in a historic merger.

In the proposed deal, Deutsche Telekom will contribute T-mobile UK Incorporatedluding the unit’s 50% stake in the 3G wireless joint venture with Hutchison, while France Telecom will add its UK broadband Internet business along with the wireless operation. The companies are likely to retain the Orange and T-mobile brands for now to prevent customer defection. A new brand, however, is expected within two years.

The British mobile market is one of the fiercely competitive markets in Europe. Currently, Spanish telecom giant Telefonica’s (TEF) UK subsidiary O2 leads the market with approximately 27.7% share. Vodafone (VOD) and France Telecom’s Orange are the second-and third-largest operators with 24.7% and 21.5% share, respectively. T-Mobile UK is the fourth-largest operator with nearly 16.6 million subscribers and roughly 15% market share. However, the unit contends with declining profit and subscriber erosion.

The merger of T-mobile UK and Orange UK will radically change the competitive landscape in the British mobile market. The combined entity would dethrone Telefonica’s O2 UK as the largest wireless operator in the UK with roughly 37% market share and cumulative subscriber base of approximately 28.4 million.

The combined network assets will create significant cost synergies that may exceed 4 billion Euros ($5.7 billion), mostly through reduced operating and capital expenditure. The consolidated entity with greater scale, larger coverage markets and distribution network will operate and compete more efficiently while sharing the expenditure associated with future network upgrades.

In order to achieve merger synergies, the joint venture plans to invest up to 800 million Pounds ($1.3 billion) for network restructuring and streamlining operations. The merger is likely to be accretive to free cash flow and earnings from 2010 and 2011, respectively.

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