Battle For T-Mobile UK Heats Up

An intense bidding war for the number one spot in the British wireless industry is shaping up as Spanish telecom giant Telefonica (TEF) has been reportedly evaluating a potential acquisition of T-Mobile UK, the British subsidiary of Deutsche Telekom (DT). This strategic step came in response to Vodafone Group’s (VOD) recently revealed acquisition plan of T-Mobile UK in an effort to lead the UK mobile market.

Moreover, France Telecom (FTE) may also join the league of bidders as it is currently exploring a joint-venture opportunity with Deutsche Telekom’s UK unit. Any of these deals, should they materialize, will radically change the competitive landscape of the British mobile market.

Deutsche Telekom is currently negotiating with European telecom operators to divest its T-Mobile UK unit, which contends with subscriber retention problems. The company’s profitability in the first quarter of 2009 was affected by an impairment loss of e1.8 billion ($2.4 billion) registered at T-Mobile UK.

The UK wireless market is characterized by aggressive competition among five major operators battling for market share and customer retention. Currently, Telefonica leads the market through its UK subsidiary O2 with approximately 27% share, followed by Vodafone (25%), France Telecom’s Orange (22%) and T-Mobile UK (15%).

Telefonica (O2 UK) surpassed Vodafone to become the leader in the UK mobile market in 2006 and further consolidated its position by winning the contract to exclusively distribute Apple Inc’s (AAPL) iPhones in the UK. However, revenue per user and subscriber growth levels have decelerated at O2 UK in the most recent quarter due to a weak economy, regulatory pressure and intense competition.

Telefonica’s move stems from the fact that a potential acquisition of T-Mobile UK by Vodafone will effectively remove the Spanish operator from the number one spot with the consolidated Vodafone leading the way with a 40% share. Under this scenario, a successful deal to acquire T-Mobile UK may serve as an effective defense mechanism for Telefonica, cementing its leadership position in the British wireless market.

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