Vodafone to make more cuts as T-Orange signs on the line

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Vodafone to make more cuts as T-Orange signs on the line

By CAROLINE GABRIEL

Published: 10 November, 2009

READ MORE: Financial | UK | Vodafone | Orange | T-Mobile

As Orange and T-Mobile signed their merger agreement for their UK arms (subject to regulatory approval), Vodafone was taking a different approach to its declining UK market share, intensifying its cost reduction program. The giant cellco, which reports its earnings today, is to increase its cost saving target by as much as 50%, to £1.5bn ($2.5bn) by March 2011.

The London Financial Times quotes Citi, the UK-based operator's broker, in reporting the stepped-up targets. Vodafone had previously set a goal of reducing operating expenses by £1bn by March 2011. The main problems for the huge carrier are declining share and margins in some of its core markets, notably the UK and Spain, as well as aggressive price competition for its relatively new operations in India.

Vodafone Essar, India's second largest cellco and Vodafone's second largest subsidiary, is expected to report disappointing results, which could drag the whole firm down as it reports interim figures. City expects it to announce total six-months revenues of £21.6bn up 8.3% year-on-year, and EBITDA of £7.5bn, up 2.8%. Vodafone could be helped by the weakness of the UK currency against the euro and by acquisitions.

And in the UK, Vodafone will be pushed into third place by the merger of Orange and T-Mobile, assuming this gets clearance (completion is still expected in the first half of next year). The main objective is to reduce the cost of delivering mobile and broadband services, but on the way, the combined entity will face several challenges, not least how to brand themselves (corporately and their individual services); how to combine billing systems, back office platforms and RANs; whether to acquire spectrum in new auctions and whether they will be able to get any low frequency licenses (both have 1.8GHz GSM networks). They also need to rationalize their backhaul systems, where T-Mobile is a heavy user of microwave and Orange of fiber.

The 'merger of equals' will see Deutsche Telekom contribute T-Mobile UK and its 50% share in its network sharing joint venture MBNL (with 3 UK), while France Telecom will add Orange UK, including £1.25bn of intragroup net debt to equalize the value of the contributions. The deal now requires the approval of regulatory authorities and of the boards of directors at both parent companies. Regulatory approval is widely expected, but not without certain conditions. Some have speculated that these could include 'compensation' to 3, perhaps through favourable termination rates or the divestment of the new JV's wholesale business.

The combined firm will have 42.9% market share at current rates - not an unusual situation, given that in 11 of the other 15 major EU markets, a cellco has more than this.