Future 'not bright' for 3 following rival merger deal

3, the smallest of the mobile network operators in the UK, will have to "fundamentally" change its business model in the wake of Orange's proposed tie-up with Deutsche Telekom, and could itself become a takeover target, analysts warned yesterday.

"I don't think the future is bright for 3," said Stephen Hartley, a senior analyst at Ovum. "It really faces two options: become a mobile virtual network operator (MVNO) or exit the market."

3, which is owned by conglomerate Hutchison Whampoa, has 8 per cent of the UK market. Orange and T-Mobile together would have 37 per cent share, O2 has 27 per cent and Vodafone has 25 per cent.

"Tuesday's deal puts 3 even further from third place," Mr Hartley said, adding the group might want to become an MVNO like Virgin Mobile or Tesco, which operate using another operator's network to cut costs. Mr Hartley added: "Hutchison could just decide to pull the plug and cut off funding for the group. Either way, 3 looks like it will have to fundamentally change its business model."

3 has long been rumoured as a potential target for consolidation in the industry, and some believe such talk could re-emerge in the wake of Orange's deal with T-Mobile.

Matt Hatton, principal analyst at Analysys Mason said: "There could be a rush to buy 3 following this deal."

3 said in a statement that the company looked "forward to seeing how the negotiations develop" between Orange and T-Mobile. One source close to the group rejected the claims it would have to change its model. "This deal makes things better for 3, with less competition – it wouldn't make sense to become an MVNO." The source added: "3 has always been subject to takeover speculation, but Hutchison would only do it at a price they were happy with."

Vodafone and O2 declined to comment yesterday, but there seemed little appetite from either to wade in with an imminent takeover offer.

T-Mobile and Orange are waiting on news of which regulatory body will review the deal. Communications watchdog Ofcom is expected to advise if the Office of Fair Trading is called in, although the two companies expect it to go straight to the European Commission. Market experts said European regulators were likely to clear the deal more quickly.

Gianvito Lanzolla, senior lecturer in strategy at Cass Business School in London, said the deal would bring "less choice and higher prices" and called for regulatory intervention. He warned: "The watchdog will have a tough job here to defend consumers."