Mobile market consolidation is risky business

By Kate Holton and Nicola Leske

LONDON/FRANKFURT (Reuters) - Consolidation within the crowded British mobile market is desperately needed but any acquirer runs the risk of overpaying and watching the benefits be shared among its rivals.

Analysts and executives have long said that the British market, with five operators, is the most competitive in Europe and consolidation is the best way to address ever-reducing margins.

"Everyone agrees consolidation is needed and seemingly T-Mobile will fall first," said Emeka Obiodu, senior analyst at industry research group Ovum.

Deutsche Telekom (DTEGn.DE) is currently deciding whether to sell its underperforming T-Mobile UK unit although a decision is not expected imminently, a person familiar with the situation said earlier this week.

Deutsche is not in a hurry to sell, however, and would expect a premium, even though the unit is hard to value because of uncertainty about how well it can hold on to its customers.

"Can (a buyer) be certain that it will have T-Mobile's entire customer base when a deal is completed? Or will it pay for a vanishing customer base?" Obiodu said.

Any sale of T-Mobile UK to one of the three big operators would also likely spur a sale of the fifth operator 3, owned by Hutchison Whampoa (0013.HK), which would benefit all remaining operators by reducing competition and improving profit margins.

Vodafone has seen margins in the UK shrink to around 22 percent from around 33 percent three years ago, while T-Mobile UK's margin has declined to 15 percent in that time.