The proposed merger of the UK units of European telecom giants Deutsche Telekom (DT) and France Telecom (FTE) in a 50-50 joint venture is set to gain clearance from the European Commission, the executive body of the European Union (EU). The commission has reportedly agreed to approve the deal with a ruling is expected in the near future.

Moreover, the European commission decided to fast-track the merger after overcoming concerns of the UK antitrust watchdog “Office of Fair Trading (OFT)” and UK ’s broadcasting regulator and competition authority “Ofcom” that the deal could significantly subdue competition in the UK wireless market.

The merger recently faced the possibility of an investigation by the OFT, which sought European Commission’s permission to scrutinize the deal as consumer groups have expressed concerns about its impact on the competitive scenario in the UK mobile market. The commission has until March 1, 2010, to decide on referring the case to the UK regulators for review.

However, the European Commission has agreed to clear the merger as France Telecom’s UK unit Orange UK and Deutsche Telekom’s British subsidiary T-Mobile UK agreed to surrender a portion of their combined broadcast spectrum (radio airwave) in the UK to speed up the regulatory approval of their proposed joint venture.

Rival operators Vodafone (VOD) and Telefonica (TEF) O2 UK demanded the merged entity to relinquish a sizable portion of the combined 1,800 megahertz (MHz) spectrum, earmarked for 4G mobile broadband services. Both OFT and Ofcom are satisfied by the joint effort of Orange and T-Mobile in releasing spectrum and concluded that the merger does not require further scrutiny by them in the UK.

The Orange/T-Mobile merger was announced in September 2009. The companies filed their appeals to the European Commission for approval of the deal in January 2010. The merger, 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 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. Moreover, the combination of T-Mobile and Orange ’s network assets will create significant cost synergies which may exceed €4 billion ($5.7 billion), mostly through reduced operating and capital expenditure.

The consolidated entity with greater scale, larger markets and distribution network will operate and compete more efficiently while sharing the expenditure associated with future network upgrades.

Zacks Investment Research

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