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Summary

Austria will soon become a fully converged fixed, mobile, and TV market, if regulatory and competition authorities approve T-Mobile's acquisition of cable TV and broadband operator UPC, which Deutsche Telekom (DT) announced days before Christmas 2017. Following the merger clearance, the market will be left with three major players all offering fixed and mobile products. A1 and T-Mobile will also offer TV, while Three will remain a telecoms-only operator.

The deal, to be made at an enterprise value of €1.9bn ($2.3bn), is expected to close in 2H18. Combined revenues of T-Mobile and UPC in 3Q17 made up 26.75% of the Austrian market, compared with A1's 56.58%. Given DT Group's strategy across its European (and German) footprint, there is no surprise the company has opted for an acquisition to enter the fixed market, especially considering its recently failed M&A attempt with Sprint in the US. The US operating segment remains the largest revenue contributor to DT Group, providing 46% of the total at year-end 2016.

Austria's year of convergence will ignite a pricing contest

In December 2017, T-Mobile Austria announced an acquisition agreement with the country's largest cable operator, UPC Austria, a subsidiary of Liberty Global UK. T-Mobile Austria, which was left the sole MNO with no fixed telco services after Three Austria acquired Tele2 in July 2017, expressed its intentions of leasing xDSLs from the Austrian incumbent A1 (starting in 2018) back in the summer of 2017.

UPC's fiber core network will allow T-Mobile to develop a stronger mobile backbone, which is significant for the development of the fifth generation in mobile. "With this acquisition, Deutsche Telekom is taking another major step to realize our strategy to become a fully converged operator in our European footprint," said DT. Additionally, the Austrian mobile market, which saw prices increase following the Orange–Three merger in 2013, could now face a discount war in the fight for growth in quad-play subscribers.

Other consumer benefits might come in the shape of support for the country's digital strategy and expansion of next-generation access. For the operators to increase their quad-play market shares, they will need to provide large data packs and invest in innovative media content. For instance, UPC's existing content portfolio could be ramped up with DT's own German content, which is currently under production for the home market for a 4Q18 launch. Lastly, T-Mobile will need an OSS/BSS in place for a fully integrated and converged customer experience across the mobile, TV, and fixed broadband ad voice services.

The deal, which is yet to be approved by competition authorities, is reportedly due to close in the second half of 2018. The combined companies' RGUs approximate 6.7 million (according to 3Q17 results) and combined revenues for 2017 are expected to reach €1.2bn (based on DT's pro forma calculations).

In terms of group strategy, DT's other moves across its footprint all reflect either M&A or development of infrastructure. Therefore, reaching the quad-play objective via an acquisition is far more likely to succeed than leasing access lines off the incumbent.

Appendix

Author

Armita Satari, Analyst, Europe

armita.satari@ovum.com

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