France Telecom and TDC's Sunrise Merge to Challenge Swisscom Dominance

France Telecom has announced it plans to merge its Orange Switzerland business with TDC's operator Sunrise in the country, in order to better compete with the dominant incumbent Swisscom. As part of the deal, France Telecom will pay Denmark's TDC 1.5 billion euro (US$2.24 billion), which will see the French operator gaining a 75% stake in the newly formed operator.

The newly formed operator will combine the strengths of France Telecom's Orange mobile business, along with some significant fixed-line business from Sunrise, and it is thought the new operator will command a 38% stake of the Swiss mobile market, and some 13% of fixed broadband connections in the country.

France Telecom says the new operator, which has yet to be named, will be headed by the current CEO of Orange Switzerland Thomas Sieber, and could generate synergies with an estimated value of 2.1 billion euro. The former French incumbent said it is too early to say whether the merger will result in any job cuts at its Swiss operations.

The deal, subject to regulatory approval, is expected to close in the second quarter of 2010.

Outlook and Implications

• Efforts to Shake Up the Swiss Market: France Telecom had hinted at the merger at the end of the third quarter, with the operator's financial director saying the smaller operators in the Swiss market were wasting time competing with each other, and none had the market power to dent the dominance of Swisscom. TDC has stated it believes that the combination will create a stronger player in the Swiss telecoms market, and should bring significant synergies which should drive down operating costs. The merger will put some pressure on Swisscom, but with the dominant incumbent still holding a share of around 60%, it is hard to see any massive shock to the Swiss market.

• TDC to Exit Switzerland? TDC has stated that it would have the right to sell its remaining 25% stake in the merged operator two years after the closure of the deal, or exit through an initial public stock offering (IPO) three years after the close. TDC also said it would take an impairment charge in the current quarter of some 4.3 billion Danish kroner (US$861 million) on the deal, but said it did not expect the transaction to alter its full-year 2009 financial outlook. The future is somewhat uncertain for the Danish operator, which is controlled by private-equity firms who are reported to be preparing an offering of the firm's stock. TDC has also effectively sold a significant stake in Sunrise to France Telecom, and left itself several options to exit the merged company in years to come—fuelling speculation it may be seeking to exit the stagnant market. Despite the deal constituting the merger of two of the largest alternate operators in Switzerland, it would be hard for the regulator to argue this will provide any kind of advantage, as the incumbent Swisscom is still clearly dominant in both the fixed and mobile sectors. As it is not a member of the European Union, the merger is also beyond the remit of any EU regulatory intervention, although it would probably not have happened if Switzerland was a member of the bloc, as the EU would have intervened before now to enforce competition. The merger has come about due to the continued dominance of the incumbent Swisscom, and the complete failure of the Swiss regulator to create effective competition in the country.

• Further Consolidation in Europe: The operator says it estimates the Swiss merger with bring operational savings of some 132 million euro a year from Network & IT, distribution, marketing and workforce optimisation, and Capex savings of 376 million euro between 2010 and 2015 (net of integration expenses). France Telecom has said it is too early to predict the effects of the merger on employment, but with so many overlaps it is inevitable that there will be significant job losses. The consolidation proposals comes just months after France Telecom agreed to merge its Orange UK mobile unit with Deutsche Telekom's T-Mobile UK, in order to allow the struggling operators to compete more effectively in the cutthroat U.K. mobile market. France Telecom had denied the merger was part of the beginning of a trend towards further consolidation in European telecoms—although today's news would appear to contradict this. As competition, regulation and saturation levels increase in Western Europe, and revenues and prices continue to fall due to the economic slowdown, IHS Global Insight expects to see more consolidation in telecoms markets before the recovery is fully felt.