Rumors resurfaced last week that two European giants, Deutsche Telekom and France’s Orange, were discussing a potential merger. The reports were quickly denied by Orange, which said there was “no project or discussion” on this matter, but nevertheless, some market analysts lent credibility to the story. Even if talks are early, or non-existent, now, the discussion highlighted several important trends in European telecoms.
One is that, in a saturating and over-competitive region for mobile services, consolidation would be the order of the day, if mergers were not sometimes blocked by European Union and national competition regulators. A combination of DT and Orange would build on existing cooperations and allow both to generate significant economies of scale.
However, even though the two companies have little geographical overlap, it is hard to believe antitrust agencies would clear a merger that would have such a major impact on the pan-regional competitive landscape, delivering the kind of scale that no other player could match.
Both companies operate in Poland, Romania and Slovakia, though DT is said to be keen to sell its Romanian subsidiary. Orange’s biggest European markets are France and Spain, and its biggest growth drivers are in Africa, while DT does not operate in any of those places.
But that would depend on how big a picture the competition authorities chose to examine. They tend to dislike deals that reduce the number of MNOs in a given market, and that would not happen in any major economy thanks to a DT/Orange combination. If regulators stuck to a fairly provincial view, then, the merger could pass muster (no doubt with some hefty conditions) in the same way that MNO deals have sometimes been barred while multiplay operators have been allowed to bulk up through acquisition, with a far greater impact on the competitive landscape for telecoms and media as a whole. This was seen when UK fixed-only incumbent BT was allowed to acquire the country’s largest MNO, EE (itself the result of a DT/Orange joint venture), creating a newly dominant converged player, while O2 and Hutchison Three were not allowed to merge as it would have reduced the total number of MNOs.
Regulation aside, there are clear reasons why DT and Orange might want to intensify their existing levels of asset sharing, even to the extent of a future merger. They have partnered on a range of initiatives from sharing network infrastructure in some markets, to co-developing the Djingo smart speaker, to engaging in joint procurement of some devices and services. Scale, efficiency, negotiating power with suppliers, and reduce R&D costs – all these are powerful motivations for operators to work together when they are in highly competitive, low growth markets with high levels of debt.
And while regulators and consumer groups might worry about reduced choice for consumers and, perhaps more pertinently, pan-European enterprises, this could be outweighed by the enlarged telco’s improved ability to invest heavily and quickly in next generation platforms such as 5G and edge cloud.
However, the process of consolidating the two giant operators could be a massive distraction from those 5G and other roll-outs. Last time these rumors swirled, in early 2018, Orange’s then-deputy CEO, Gervais Pellissier, said: “Nobody has proven that big consolidation is value creating.” He also pointed out that DT had a higher market capitalization and so would, effectively, acquire Orange, which could face opposition from the French government. That barrier would still exist – Orange’s market cap is currently about €40bn ($44bn), while DT is valued at nearly €73bn ($80bn).
A merger would create a mobile behemoth boasting 67.3m mobile subscribers across the two major European economies (21.7m in France and 45.6m in Germany). Overall, DT has 181.8m mobile subscribers across its footprint (including 84.2m at T-Mobile USA), while Orange has a mobile footprint of 209.4m. As for video, DT has 4.9m subscribers in Europe, distributed across IPTV, satellite and cable (of which 3.5m are on Magenta TV in Germany), while Orange’s video footprint sits at just under 10m subs across IPTV and satellite TV.
On the fixed line front, Orange has 38.5m connections across its footprint, of which 27.9m are in France and nearly 3m of these are FTTH. DT has 13.6m broadband lines in Germany, with a much greater fiber presence with nearly 8m 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.