EUROPE’S BIGGEST telephone company Deutsche Telekom and France Telecom have agreed to merge their British businesses – T-Mobile and Orange – to form the country’s largest mobile-phone operator, Dow Jones said yesterday, citing unidentified people with knowledge of the transaction.

The 50-50 venture will oust Telefónica’s O2 service from the top spot and will have 30 million subscribers, or 38 per cent of the UK market.

The accord would end months of speculation during which Deutsche Telekom had been expected to sell or fold its UK unit into a joint venture. An announcement on the deal is expected to be made today, Dow Jones said. The venture would reduce the number of mobile phone operators in the UK to four, with the others being Vodafone and Hutchison Whampoa.

The deal would consolidate a market that has been more competitive than Italy and France. “Deutsche Telekom’s UK unit is just too small to compete in this crowded and saturated market, and profitability is declining as a result,” said Theo Kitz, an analyst at Merck Finck in Munich.

Mr Kitz has a “sell” rating on the shares. The company has been studying options for its T-Mobile UK unit since February, a person involved in the discussions had said earlier, declining to be identified as the talks were private.

Phone firms are looking to reduce costs as clients are spending less amid the slowdown. In May, Vodafone, Deutsche Telekom, Royal KPN and Mobistar said the recession was eroding profit as consumers and businesses reduced mobile phone use.

Deutsche Telekom spokeswoman Anna Bischof declined to comment, as did Michael Lange, a spokesman for T-Mobile International, and France Telecom spokesman Tom Wright.

The Bonn, Germany-based company had been in talks with Vodafone, Telefónica and France Telecom, and had retained JPMorgan Chase to review options.

People familiar with the talks said the unit could fetch more than £3 billion (€3.4 billion). Vodafone and Telefónica made informal offers to buy it for about £4 billion, the Financial Times said yesterday.

Subscribers to T-Mobile UK services fell 0.6 per cent in the second quarter from the preceding three months, according to Deutsche Telekom.

O2, owned by Telefónica, had 27.7 per cent of the UK mobile-phone market by revenue in the second quarter, followed by Vodafone’s 24.7 per cent and France Telecom’s Orange with 21.5 per cent, based on the companies’ results. – (Bloomberg)