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28 November 2019

DT-Orange merger rumors not so silly this time around

Deutsche Telekom’s knee-jerk reaction to its complete and utter repulsion regarding the green-lighting of the Liberty Global-Vodafone deal (which it is still attempting to block by the way), is the pursuit of a merger with Orange (again).

The French telco immediately rubbished the rumors, surfaced initially this week by German news outlet Handelsblatt, but the idea is not as implausible as most other publications believe. Ever since DT and Orange joined forces on developing the Djingo/Magenta voice assistant and smart speaker in early 2018, we knew this was not your run of the mill alliance.

Handelsbatt has done little more than claim that DT CEO Timotheus Höttges is currently weighing up options for a merger with Orange, citing no one in particular, yet the timing this time around is poignant. The resurfacing of a merger between the two operators suggests that DT, together with cable industry associations and some smaller MSOs, is failing to convince the German legal system to overturn the European Commission’s decision for Vodafone to acquire Unitymedia for €18.4 billion.

If that’s true, then DT certainly needs a plan B, but saddling up with a telco giant over the border in France does not make immediate sense for its homegrown broadband business. Nevertheless, it would create a mobile behemoth boasting 67.3 million mobile subscribers across the two major European economies (21.7 million in France and 45.6 million in Germany).

Overall, DT has 181.8 million mobile subscribers across its footprint (including 84.2 million at T-Mobile US), while Orange has a mobile footprint of 209.4 million. As for video, DT has 4.9 million subscribers in Europe, distributed across IPTV, satellite and cable (of which 3.5 million are on Magenta TV in Germany), while Orange’s video footprint sits at just under 10 million subs across IPTV and satellite TV.

On the fixed line front, Orange has 38.5 million connections across its footprint, of which 27.9 million are in France and nearly 3 million of these are FTTH. DT has 13.6 million broadband lines in Germany, with a much greater fiber presence with nearly 8 million optical fiber lines. Some 60% of the German broadband market is served by HFC networks and the horror situation facing DT is that Vodafone will dominate with 80% of the cable market, albeit licensing a share of this to Telefonica Deutschland.

These figures paint a scenario of two tier 1 operator giants of similar size, although the respective market caps argue otherwise. Orange is valued at about €40 billion while DT is almost double that at a €72.3 billion valuation, which is mostly down to the US business.

Critically, just a few years ago we would have dismissed the credibility of European regulators ever clearing the way for a move as audacious as Deutsche Telekom merging with Orange, despite the minimal overlap in their respective home territories. They do, however, compete in a number of European countries, but – as we continue to reiterate – the European Commission set the bar when it reduced competition in the Netherlands by allowing Liberty Global’s UPC firstly to merge with Ziggo, and then with Vodafone. Now, anything is possible.