Why Vodafone wants to buy T-Mobile now

Why Vodafone wants to buy T-Mobile now

The spectre of one UK mobile network buying or merging with another for the first time in the industry’s history drew closer this week.

Strong indications emerged that Vodafone was lining up a deal to buy T-Mobile’s UK business.

There have been hints over the last three years that consolidation is needed among UK operators, but this week’s reports of a potential buyout had greater plausibility. The reason: the UK operators are having to give away more value to maintain revenue.

Consolidation has quickly become a priority for operators running out of options to halt the slide in profit margins.

Big Four revenue

It is six months since Vodafone’s UK CEO, Guy Laurence, has been in his job. The man, who had performed miracles in the Dutch market, was warned by many that the UK would present a stiffer challenge.

Perhaps the starkest warning came from outgoing T-Mobile UK MD Jim Hyde, who left at around the same time as Laurence joined, with a powerful parting shot on the UK: ‘I have a greater appreciation of what the world is like when there is 120% penetration and four of the biggest operators in the world are fighting for share. I’ve lived it and absolutely appreciate it.’

Six months on, and having surveyed the competitive pressure in the UK, Laurence has confided to close aides on the intense pressure for Vodafone in the UK.

In the third quarter of 2007, Vodafone had revenues of £1.4bn. For the following six financial quarters, that figure failed to move above £1.3bn up until March this year.

Falling profits
More importantly, profits have consistently fallen from £379m since Q3 2007, dropping to £295m for the final three months of 2008, and that same £295m profit was posted for the first quarter of this year.

To put those numbers in context, T-Mobile has had an even grimmer period since Q3 2007.

Revenue of £1.14bn in Q3 2007 has been falling like a stone since, dropping down to £760m for the first quarter of this year.

Causing greatest panic for T-Mobile’s parent company in Bonn, profits have tumbled more sharply in that period: down from £248m to £103m.

All of the operators have savagely cut costs in a bid to improve profits.

Big Four profits

(NB Orange has annual profit levels only, which have been averaged into quarters. Also, Orange figures represent mobile and not broadband)

But Vodafone realises it needs massive structural change in the UK market. And it appears willing to force that change.

One senior Vodafone source said: ‘There is a realisation that we have done everything we can do. We have had a few CEOs try and win in the UK and are still not winning, so we need to change the playing field.’

T-Mobile is the most vulnerable in the UK, and has a parent company not willing to pump cash into it.

Deutsche Telekom’s young CEO, Renee Obermann, installed Richard Moat as UK MD last month, and he started last week. His brief appears to be to stabilise the business, cut costs and build the brand. It appears a last throw of the dice before Obermann concedes he has to cut the UK unit loose.

Obermann has previously said: ‘We feel the UK market is competitive, and consolidation would do good for that market.’

His opposite number at Vodafone, Vittorio Colao, is also keen to find some calm in the UK, which has become known for cut-throat pricing, high subsidies and declining profits.

Colao recently said: ‘I don’t know if there is a three-way [merger], I don’t know if there is a two-way, there may not be a way at all. But it is clear to me that there are a few markets around the world where consolidation would make sense and we are one of the leading players, so we have a duty to look at everything. If things make sense and it improves the conditions in the market, we will try our best.’

Written by Mobile Today
Mobile Today


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