-- Eric Auchard is a Reuters columnist. The opinions expressed are his own --
By Eric Auchard
LONDON, July 3 (Reuters) - Major players in Britain's highly competitive wireless market face a prisoner's dilemma when deciding whether to bid for T-Mobile UK.
Though a merger would be expected to produce big savings and less price competition, the dynamics of the market are slippery. And rivals stand to benefit from consolidation as much as the actual buyer does.
The top three players have more or less one quarter each of the UK mobile market, in terms of subscribers. 02 is top at 27 percent, Vodafone has 25 percent and Orange follows closely with 22 percent, according to data from Enders Analysis. T-Mobile, a unit of Deutsche Telekom counts for around 15 percent, with another 3 percent if you add Virgin Mobile subscribers running on its network.
As almost any combination would be likely to create a dominant player in terms of market share. This makes T-Mobile UK the sort of prize no rival can afford to have fall into another operator's hands.
But subscriber market share figures disguise big differences between the carriers. Whatever market share T-Mobile may appear to have could evaporate quickly under new ownership. This is because T-Mobile has a large, unstable base of prepaid consumers who can switch carriers easily to chase the cheapest or best value plans.
T-Mobile also derives a large share of its profits by reselling its network capacity to Virgin Mobile. Nomura estimates as much as 45 percent of T-Mobile's cash flow comes from the Virgin Mobile deal. Any change of control that threatened its contract with Virgin would lower the value of T-Mobile.
Because of the vagaries of airwave spectrum allocation, cost savings from running networks in common are less than one might hope. Citigroup estimates 200-300 million pounds of savings three to five years out, implying synergies with a present value of around 1 billion pounds. This would have to cover any deal premium and discount for lost customers who switch away if the T-Mobile brand is absorbed. Orange and T-Mobile use similar frequencies, strengthening potential cost savings.
This is why some bidders are exploring alternative approaches. One option is that Orange and T-Mobile could agree to a joint venture that achieves certain cost savings with no premium for change of control. (See related Reuters analysis at or http://tinyurl.com/tmleske/). Another alternative could be some sort of asset swap between countries: Vodafone could trade its difficult Turkish property with T-Mobile to expand its UK consumer business, for example.
Even so, any deal involving T-Mobile and one of the three major players would have to get past competition issues raised by the winning bidder controlling as much as 40 percent of the market. (See or http://tinyurl.com/vodafocus/)
Indeed, the easiest deal from a regulatory perspective is the one the media is not talking about because T-Mobile would have to be a seller rather than a buyer. This would involve T-Mobile buying out Hutchison Whampoa's 3 Mobile, a distant No. 5 player in the UK with 8 percent share of subscribers. This would create a fourth major player, with the remaining quarter of the market. Besides, the two companies already share networks and have some similar customers.
There is every reason for 02, Vodafone and Orange to participate in the auction of T-Mobile, which has hired JP Morgan to weigh its strategic options.
The game comes down to this: Make your competitor pay up as much as possible, and count on a drawn out regulatory process to distract them further. Then sit back and harvest the benefits of a more rational market with one less competitor with less incentive to undercut you on price. Even the losers of any auction of T-Mobile will stand to benefit.
-- At the time of publication Eric Auchard did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. For previous columns, Reuters' customers can click on --
(Editing by David Evans)