Orange & T-Mobile Confirm UK Merger Details

­Deutsche Telekom and France Telecom have announced the signing of the final agreement to combine their UK operations, T-Mobile and Orange, into a 50:50 joint venture company. Now that the confirmatory due diligence has been completed, this binding agreement confirms the terms of the transaction announced on 8 September 2009.

Completion is conditional upon approval by the relevant authorities and remains expected in the first half of 2010 as previously indicated. The agreement is subject to the approval of the Supervisory Board of Deutsche Telekom and the Board of Directors of France Telecom.

Gervais Pellissier, deputy CEO in charge of Group Finance & Information Systems, said: "The relative terms of the transaction as announced on 8 September were fully confirmed. I would like to stress the excellent cooperation between the teams of Deutsche Telekom and France Telecom, which enabled us to deliver on the timing and process objectives which we set out in September. This is an important step towards our objective of establishing an excellent platform to deliver operational synergies and offer innovative and high quality services to our customers."

The business will have pro forma 2008 revenues of approximately £7.7 billion (US$12.6 billion) and EBITDA of £1.7 billion (US$2.8 billion).

The merged venture is expected to lead to operational cost savings of £445 million (US$730 million) per year from 2014 onwards. These savings will be dependent on up to £800 million (US$1.3 billion) in integration costs over the period from 2010 to 2014. Those costs would primarily relate to the decommissioning of mobile sites, the rationalisation of the network of retail stores and the streamlining of operations.

On the CAPEX side, large scale savings are expected over the first five years following completion of the transaction, resulting from the integration and unification of the networks and from jointly expanding 3G coverage. The potential for capital expenditure savings, net of integration capex, is estimated at £620 million (US$1 billion) on a cumulative basis over 2010-2014, prior to stabilising at approximately £100 million a year from 2015 onwards.

To create the new joint venture, Deutsche Telekom would contribute T-Mobile UK on a cash-free, debt-free basis, including T-Mobile UK's 50 percent holding in its 3G network joint venture with Hutchison and gross tax losses carried forward of at least £1.5 billion. France Telecom would contribute the whole of Orange UK including £1.25 billion of intra-group net debt in order to equalize the value of the contributions to the joint venture.

Immediately after closing Deutsche Telekom would grant a £625 million shareholder loan to the joint venture, which would be used to simultaneously reimburse £625 million to France Telecom. As a result, the joint venture would have indebtedness of £1.25 billion, represented by two shareholder loans of £625 million held by each of Deutsche Telekom and France Telecom.

The Board of the new joint venture company will have balanced representation from Deutsche Telekom and France Telecom. The management team would be led by Tom Alexander, currently CEO of Orange UK, as CEO and Richard Moat, currently CEO of T-Mobile UK, as COO. The governance of the joint venture would attribute extensive operational decision-making to the management team.

The T-Mobile UK and Orange UK brands will be maintained separately for 18 months after completion of the transaction. During that period management will review branding alternatives for the joint venture and will develop a new branding strategy recommendation for shareholder approval.

Posted to the site on 6th November 2009