Vodafones T-Mobile Play – US-FOREX.US
Britain’s crowded mobile phone sector has been great for consumers, but terrible for the margins of its five big players. That’s why reports on Monday that Vodafone was exploring a bid to buy T-Mobile U.K., the British mobile network unit belonging to Deutsche Telekom, came as little surprise. Not only had Deutsche Telekom booked a 1.8 billion-euro write-down on T-Mobile U.K. in the first quarter, it has openly expressed an interest in reviewing the unit’s strategic operations. But that doesn’t mean Vodafone will bag T-Mobile U.K. on the cheap.
Deutsche Telekom
would be selling at the bottom if it were to do a deal with Vodafone now, said telecoms analyst Michael Kovacocy of Daiwa Institute of Research, Europe. The unit’s profit margin dropped below 15% in the last quarter, and “I doubt that they would want to use that as a basis for a deal.”
A more likely scenario: T-Mobile U.K. sticks around and tries to raise its profit margins by selling more contract deals to consumers, and hope the British economy improves in the meantime. “This pushes any potential deal out at least a few quarters,” said Kovacocy.
Yet Vodafone
won’t want to wait that long, and for a higher price tag on a company that is worth approximately 5 billion, with goodwill set near to 2 million, according to Cantor Fitzgerald global strategist Stephen Pope. The British mobile giant has been struggling, like its rivals in the U.K., in a highly dense field. Whereas most countries have three or four leading mobile phone networks, Britain has five: Telefonica’s
O2 being the largest; followed by Vodafone; France Telecom’s
Orange; T-Mobile and Hutchison Whampoa’s 3. Vodafone has also suffered from strong take-up of Apple’s
iPhone in the United Kingdom, which is only available under a contract with O2.Buying T-Mobile would help Vodafone capture a larger share of the retail market to rival O2, and although the company is in debt, new dividends from 45%-owned Verizon Wireless should help it pay that down in the near future. Many investors expect the Verizon
unit to start paying significant dividends its two parent companies from around 2012, said Tom Gidley-Kitchin, an analyst at brokerage firm Charles Stanley.
Gidley-Kitchin believes Vodafone’s reported interest in T-Mobile U.K. is illustrative of the strategy of its new, pragmatic chief executive, Vittorio Colao, who’s business plan is focused on cash flow more than strategic growth. “He’s said he’s not going to do transformational acquisitions,” said the analyst. Rather than the big strategic acquisitions made by predecessor Arun Sarin several years ago in emerging markets, Vodafone has recently done little more than increase its stake in a South African telecoms company and merge with Hutchison’s 3 Australia. With that in mind, if T-Mobile doesn’t work out, there’s always Hutchinson. Analysts think that company’s operator could also be the extra “fifth player” that gets bought out if T-Mobile manages to remain independent.