Orange and T-Mobile are set to create "a new UK champion" after their European parent companies confirmed the mobile phone groups will merge.
After weeks of negotiations and rival offers from O2 and Vodafone, the owner of T-Mobile UK, Deutsche Telekom, and Orange's parent, France Telecom, yesterday announced the exclusive negotiations to form a 50:50 joint venture.
The deal, which is expected to complete next year, will create the largest mobile operator in the UK with 28.4 million customers, representing 37 per cent of the market's subscribers. Their closest rival, O2, has 27 per cent. O2 and Vodafone, who tabled bids for T-Mobile last month, declined to comment.
Matt Hatton, the principal analyst at Analysys Mason, said: "This is a very big deal for the UK market. It is good for Orange and T-Mobile because, for network operators, it is all about scale; generally the bigger the better."
The venture will be headed by Tom Alexander, the chief executive of Orange, with Richard Moat, brought in to head T-Mobile UK in May, becoming the chief operating officer.
Mr Moat said: "Deutsche Telekom looked at a number of M&A opportunities and an organic turnaround strategy for T-Mobile UK. They decided this was the best route for the shareholders and the business." Mr Alexander added: "The scale gives Orange opportunities to become more competitive."
The two companies said the deal would bring "substantial benefits to UK consumers". It will expand the network coverage, and the quality of their G and 3G services. "It's about building the best network, not just the biggest," Mr Alexander said. The company added that the merger should generate synergies of €4bn (£3.5bn) through combining network and IT operations, cutting site rental and maintenance costs as well as, inevitably, reducing staff numbers.
The group plans to expand its operations in the smartphone market. Mr Alexander said: "The whole vision is to build a network that's very strong for supporting new devices. It is much more than just about voice and text."
Customer bills are unlikely to fall in the wake of the tie-up. Mr Hatton, of Analysys Mason, said: "UK consumers get a pretty good deal and the margins are tight, so I wouldn't anticipate any great price discount."
The two brands will continue to operate independently for 18 months after the deal is signed, before the management decides on a single name for the fully integrated group in 2012. Tim Höttges, the chief financial officer of Deutsche Telekom, said it was the first step in "creating a new UK champion" in a market "which is undoubtedly one of the toughest and most competitive".
The deal is likely to face scrutiny from regulators in the UK and Europe. Yet, Mr Höttges said: "We do not expect big remedies for the deal. We don't believe the market dynamic will lose momentum as a result." Credit Suisse was not so sure: "On its own the European Commission might pass the deal quite fast. But the UK could complicate and slow down the process, given the Ofcom review of the UK mobile market, the coming spectrum auction and the GSM refarming question."