T-Mobile UK to merge with Orange

Orange, owned by France Telecom, and Britain's T-Mobile, the UK arm of Deutsche Telekom's mobile phone business, are to merge their owners said.

The deal will create a firm with 37 per cent of the market and 30m customers, overtaking current leader O2, owned by Spanish telecoms player Telefonica, which has 27 per cent.

The deal would be a 50-50 joint venture, with France Telecom injecting €1.2bn into the group. The two brands are expected to continue to be run separately, although the combination of administrative functions will save the joint venture more than €4bn per year.

The news will come as a bitter disappointment to both O2 and Vodafone, who are thought to have tabled unsuccessful bids for T-Mobile after months of negotiations. The firm's underperformance resulted in a €1.8bn writedown by its German owner earlier this year, increasing pressure to improve its position from shareholders including the German government and private equity group Blackstone.

However, although the deal looks to be a winner on paper, it is sure to be scrutinised closely by competition watchdogs, both in the UK and Europe.

It is also uncertain what will happen to Virgin Mobile and 3, which both have network-sharing agreements with T-Mobile.

WHAT THEY ARE SAYINGThomas Friedrich, of UniCredit, in the Times: "How this [a joint venture] can be more valuable than an attractive outright cash offer for the asset, is hard to imagine. However, if they arranged a deal in which France Telecom had the option of buying the complete stake in five years for an attractive multiple, such a deal could make more sense." ·