Deutsche Telekom and France Telecom have signed contracts to set up a 50:50 joint venture that combines their UK operations, T-Mobile and Orange.
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Regulators must still approve the deal, which will give the new company some 28.4 million subscribers, or an estimated 37% of the UK mobile telephony market, eclipsing O2's 27%.
The business will have a pro forma revenue of around £7.7bn and earnings before interest, tax, depreciation and amortisation of £1.7bn. The merger is expected to save £3.5bn.
Spokesmen for the two companies stressed the long-term cooperation required to make a success of the deal. Deutsche Telekom CFO Timotheus Höttges said the deal was based on the "full commitment of Deutsche Telekom and France Telecom to a long-term partnership".
Gervais Pellissier, deputy CEO of France Telecom's group finance and information systems, stressed the "excellent cooperation" between the two firms. "I am certain that this spirit of professionalism and partnership will shape the future of our joint venture," he said.