-- Eric Auchard is a Reuters columnist. The opinions expressed are his own --
By Eric Auchard
LONDON, June 29 (Reuters) - A Vodafone takeover of T-Mobile UK to create the country's dominant mobile operator would be bad news for consumers and competitors. It might even be bad news for Vodafone itself.
Wireless operators are hungry to consolidate the UK market, which, with five players, is notoriously competitive, relative to the rest of Europe. UBS estimates that profit margins for the five UK players are 11 percentage points lower than the European average.
Greater scale is, of course, the justification for such a deal. Vodafone takes in 25 percent of the revenue in the UK market, while T-Mobile has around 15 percent. Including Virgin Mobile, which runs on T-Mobile's network, the combined group would control nearly half the market in subscriber terms.
T-Mobile UK has played a role in undercutting rivals on price. Consolidating a disruptive pricer would no doubt drive up costs for consumers.
However, a potential combination would be likely to fall foul of competition rules. Regulators have in the past blocked the consolidation of supermarkets, with positive results for consumers. Lloyds' emergency rescue of HBOS in the banking sector is the notable exception.
The real aim of floating a T-Mobile/Vodafone tie-up may be to test regulators willingness to consider other options across the UK telecoms market, including airwaves or smaller merger deals. The fact that T-Mobile is up for sale and has reportedly hired J.P. Morgan as a strategic advisor suggests that its owners expect flexibility from regulators.
The only deal that is likely to pass muster with regulators is one involving No. 4-ranked T-Mobile with Hutchison Whampoa's , which is a distant No. 5 in the UK market, with just 8 percent of revenues.
Arguments about scale make more sense here as a deal would create a fourth player with sufficient scale to compete, joining its bigger rivals -- Telefonica's O2, Vodafone, France Telecom's Orange, each with about one quarter of the market.
For Vodafone, the pursuit of scale in the UK could also prove illusory in a fast-changing market that depends on fickle consumer tastes. It should focus instead on creating differentiated products and services that appeal to its existing mix of business and consumer subscribers rather than diluting margins by buying up T-Mobile's lower quality, largely pre-paid customer base.
The danger for Vodafone is of overpaying for T-Mobile UK, which estimated to be worth around 3.5 billion pounds. With customer turnover high between operators, it's no sure bet that T-Mobile customers would stick with Vodafone if a deal were consummated. Vodafone might end up paying billions of pounds for a disappearing customer base.
-- At the time of publication Eric Auchard did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. For previous columns, Reuters' customers can click on -- (Editing by David Evans)