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Vodafone-DT deal in UK and Turkey draws closer
Published: 9 July, 2009
Tags >> UK | Vodafone
A deal for Vodafone to take over T-Mobile UK could be announced as early as next week, with its supporters cheered by a statement from regulator Ofcom, that it did not think a review of the competitive position in the UK was necessary. Although not related to the T-Mobile issue, this was taken as a sign that the regulator would look kindly on a deal, since it believes the UK market is "fiercely competitive".
It seems increasingly likely that any transaction will take the form of an asset swap rather than a straight purchase. Although Vodafone has repeatedly said that its growth opportunities lie mainly in developing economies, it may be considering an exit from Turkey, in order to get its hands on T-Mobile UK, according to press reports.
Deutsche Telekom is said to favor an asset exchange rather than a straight acquisition - in which case Vodafone could swap for its Turkish unit. This would also please Vodafone shareholders, given that the operator has been squeezed in Turkey, and would not have to part with cash or raise new financing. The UK's Sunday Times reported that Vodafone CEO Vittorio Colao wants to reshape the cellco's portfolio by trading assets rather than raising large sums - and DT is understood to be targeting at least €3bn ($4.2bn), six times T-Mobile UK's EBITDA, for the unit, with Orange and O2 also possibly interested in a deal.
Vodafone acquired Turkish operator Telsim in December 2005 for $4.55bn, but had to embark on a $1bn program to upgrade its network and has invested heavily to hold onto its second placed position. In its most recent annual results, Vodafone took a £550m ($890m) writedown against its Turkish operations, with mobile penetration at about 92%. Despite these difficult conditions, though, it would be a major U-turn to exit a market that still has strong growth potential in new services, just as Vodafone seems to have completed most of the investments needed to take advantage of this. In return, it would get one fewer competitor in the large but overcrowded UK market, and leapfrog leader O2 (subject to regulatory agreement) - a move that would bring scale but only limited growth potential.
As if to reinforce the irony of selling a new market cellco for a UK one, Vodafone Europe CEO Michel Combes said last week that western European mobile revenues were under intense pressure. He identified roaming and enterprise revenues as particular problem areas, speaking at a conference in Paris. "We are experiencing pressure on revenue, but we are resisting better than others," he said, and looked forward to "considerable growth potential" in the region in the medium to longer term. But he said that Asia and India remained Vodafone's main growth drivers.
For Deutsche Telekom, Vodafone Turkey would fit well into its eastern and central European footprint and complement Greece's OTE, which the Germany giant acquired last year. "But there are also other assets in central and eastern European countries that could help [DT] shore up its position in markets in which it is already active," a source told the London Financial Times.
