Deutsche Telekom (DT), the largest telecom carrier in Germany, has reportedly initiated negotiation with rival European operators to dispose its British subsidiary T-Mobile UK, which has been contending with subscriber retention problems. The company has began preliminary discussions with its peers Vodafone (VOD), France Telecom (FTE) and Telefonica (TEF), who have expressed interest to buy the struggling entity with a long history of under-performance.

The UK wireless market represents one of the most intensely competitive markets in Europe, with five major operators currently battling for market share and customer retention. UK exited 2008 with nearly 76 million cell phone subscribers and 124% mobile penetration. Currently, O2 UK, which is owned by the Spanish telecom giant Telefonica, leads the market with approximately 27.7% share. Vodafone (24.7%) and France Telecom’s Orange (21.5%) remain the second and third largest operators, respectively.

T-Mobile UK is the fourth largest operator in the British mobile market, with approximately 16.6 million subscribers and 14.9% market share. However, the company continues to experience decelerated revenue per user and profit margins due to aggressive price competition and regulatory pressure.

Reported revenue at T-Mobile UK declined 13% year over year in the last quarter due to unfavorable regulatory measures and competition. Additionally, the entity is also struggling with customer retention issues, reflected by year over year increase in churn (customer switch to competitors).

The potential divestiture of T-Mobile UK may fetch €4 billion (US$5.7 billion) to Deutsche Telekom. Funds raised through this transaction will help the company to further strengthen its growing US wireless business. The deal, if eventually materializes (not likely before October 2009), will radically change the competitive scenario in the British mobile market. The eventual buyer of T-Mobile UK will be well positioned to capture the largest share of this market.
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