The proposed merger of the UK units of European telecom giants Deutsche Telekom (DT) and France Telecom (FTE) in a 50-50 joint venture faces the possibility of an investigation by the Office of Fair Trading (OFT), the UK antitrust watchdog. OFT is of the opinion that the merger deal could significantly subdue competition in the UK wireless market.

The companies had announced their merger plan in September 2009 and filed their appeals to the European Commission, the executive body of the European Union (EU), for approval of the deal in January 2010. The commission is expected to provide a ruling on the case by March 1, 2010. If approved, Deutsche Telekom’s British subsidiary T-mobile UK will combine with France Telecom’s Orange UK in a historic merger.

OFT has reportedly sought European Commission’s permission to scrutinize on the merger deal as consumer groups are increasingly worried about the impact of the deal on the competitive scenario in the UK mobile market. While the European Commission currently has jurisdiction over the proposed merger deal, it may consider referring the case to the UK regulators for review under special circumstances.

If OFT’s request is granted, then the UK antitrust agency may refer the case to UK’s Competition Commission for a thorough investigation, which could delay the merger until 2011 or may potentially block the deal in ta worst-case scenario. Orange and T-Mobile, however, are preparing to appeal to the European Commissions to reject OFT’s request in an effort to keep the investigation in the EU (instead of UK), which will enable the carriers to conclude the deal by mid-2010.

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 an approximately 28% 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 a roughly 15% market share. However, the unit contends with declining profit and subscriber erosion.

The merger of T-Mobile UK and Orange UK, which will reduce the number of operators from five to four, 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 a roughly 37% market share and a cumulative subscriber base of approximately 28.4 million.

Besides offering significant cost synergies, the combination of T-Mobile UK and Orange’s network will enable the consolidated entity to operate and compete more efficiently with greater scale, larger coverage markets and distribution network.

Zacks Investment Research

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