Orange-T-Mobile UK Merger Hiccup, Carrier Consolidation in the US

In the UK, the proposed merger between the UK unit of France Telecom/Orange and T-Mobile hit a bit of a snag. According to Bloomberg the UK Office of Fair Trading wants to take over review of the deal from the EU. If that regulatory transfer should occur, it could delay or even thwart the ultimate completion of the merger. If concluded the combined operation would represent the UK's single largest operator with roughly 43% of UK mobile subscribers.

Back in the US market tier-two carrier Leap Wireless, which operates Cricket wireless, is seeking a buyer. According to a report earlier this week in the Wall Street Journal:

Cellular provider Leap Wireless International Inc. has hired advisers and formed a special board committee to look into selling the company or merging with rivals, several people familiar with the matter said . . . 

While some bankers consider rival MetroPCS Communications Inc. as the most likely partner for Leap, the company's advisers have in recent weeks been feeling out larger wireless carriers such as AT&T Inc. and Verizon Wireless to see if they would be interested in acquiring Leap, these people said . . .

One indicator of the change in prepaid operators' fortunes: Leap in late 2007 spurned an unsolicited all-stock offer from MetroPCS initially valued at $5.5 billion, about five times Leap's current market value.

The company has just under 5 million customers, most of whom are "underserved" by the broader market: 

  • 60% are from "ethnic groups"
  • 55% are under 35 years old
  • 50% earn less than $35,000 per year 

The prepaid carrier offers a $45 monthly unlimited plan. Most of its customers, however, don't use the mobile Internet but are heavy SMS users. The impetus behind Leap's search for a merger or buyer is pressure from "above," in the form of major carriers encroaching on the prepaid carrier domain. In particular Sprint with Boost and Virgin is making significant gains among Cricket's prospect base, which it identifies as "91 million" people in the US.

Another thing to contemplate is whether Sprint itself and T-Mobile in the US will be compelled to do some sort of deal like the Orange-T-Mobile proposed merger in the UK in order to compete against larger rivals AT&T and Verizon. Sprint's WiMax/4G advantage may be very short lived as Verizon and AT&T push LTE aggressively. Reportedly those rollouts are on schedule.

Sprint doesn't seem to be able to do much to grow its post-paid business and T-Mobile is in roughly the same boat. The market will put pressure on both to do . . . something. We'll see whether that pushes them together.