June 29 (Bloomberg) -- Vodafone Group Plc, the world’s largest mobile-phone company, is considering a bid for T-Mobile UK Ltd., the British wireless unit of Deutsche Telekom AG, a person familiar with the situation said.

Newbury, England-based Vodafone may make an offer or form a joint venture, said the person, who asked not to be identified because the discussions are private. The deal would create an entity with about 35 million subscribers, or 50 percent of the U.K. mobile market. The German company’s unit, T-Mobile UK, had sales of 4 billion euros ($5.6 billion) last year.

“This would make Vodafone’s competitive position stronger,” said Joris Franssen, who helps manage about 400 million euros at Kempen Capital Management in Amsterdam, including Deutsche Telekom and Vodafone stock. “Fewer players in the market often means more stable pricing, which will make the business more profitable.”

Vodafone operates in the crowded U.K. mobile-phone market, where five companies offer services, compared with four in Italy and three in France. Bringing together its U.K. mobile operations with those of Deutsche Telekom may fit into the strategy of Vodafone Chief Executive Officer Vittorio Colao, a former McKinsey & Co. partner who took over in July last year. Colao is pushing managers to bolster existing operations and squeeze more profit from them rather than expand in new markets.

Profits are falling at phone companies as clients spend less amid the economic slowdown. Vodafone and European phone companies including Deutsche Telekom, Royal KPN NV and Mobistar SA said in May that the recession is eroding profits as consumers and businesses cut back on mobile-phone use.

More Subscribers

Vodafone rose 8 pence, or 0.7 percent, to 117 pence as of 10:10 a.m. in London. Deutsche Telekom rose 1.8 percent to 8.38 euros as of 11:08 a.m. in Frankfurt.

A spokesman for Vodafone declined to comment on whether the company is considering a bid for T-Mobile UK. T-Mobile spokeswoman Silke Armann also declined to comment.

Vodafone and Hong Kong-based Hutchison Whampoa Ltd. this month completed a merger of their Australian units, forming the country’s third-largest mobile-phone operator. The U.K. company is also raising its share in South Africa’s Vodacom Group Ltd. and last year took a stake in Poland’s Polkomtel SA.

Deutsche Telecom T-Mobile UK has an enterprise value of about $4.2 billion to $5.6 billion, the Financial Times reported today. The unit had a goodwill asset value of 2.07 billion euros, according to Deutsche Telekom’s 2008 annual report, down from 2.7 billion euros a year earlier.

Economic Woes

An acquisition of Deutsche Telekom’s U.K. operations, including connections for Virgin Mobile subscribers, would boost Vodafone’s U.K. users to more than 35 million. In August, media and telecommunications regulator Ofcom said there are more than 70 million mobile-phone subscribers in the U.K.

Vodafone had 18.7 million U.K. mobile customers at the end of March, it said May 19, while Deutsche Telekom had 16.7 million, according to its Web site.

Vodafone cut its sales forecast twice last year and didn’t give one for the current year, blaming the economic climate. On May 19, the company said it sped up cost cuts to counter the economic slump and said earnings this year may fall.

“Vodafone’s growth is faltering,” Societe Generale analysts including Ottavio Adorisio and Thierry Cota, said in a note today. “M&A is therefore the only vehicle available for growth.” The purchase of Deutsche Telekom’s U.K. unit makes sense as the market is the “most fragmented in Europe” and such a deal would allow Vodafone to cut costs, they said.

Strategic Options

Several publications including Turkish newspaper Taraf reported this year, without saying where they got the information, that Vodafone could get T-Mobile UK from Deutsche Telekom AG in exchange for the U.K. company’s Turkish unit. Vodafone Turkey denied the reports, saying it wants to expand the business.

Deutsche Telekom has appointed JPMorgan Chase & Co. to advise it on its strategic options, the FT said.

Deutsche Telekom Chief Executive Officer Rene Obermann on May 7 said the company will take a “long-term” view on the unit and that he backs the division’s “chances in the medium to long-term.” Deutsche Telekom’s U.K. unit had the biggest drop in subscribers of its 16 wireless divisions last quarter.

A sale the unit or a merger with Vodafone’s U.K. operations would give the Bonn, Germany-based company an exit from a market that has been difficult. In May, Deutsche Telekom reported a first-quarter loss after a writedown at the U.K. mobile-phone unit of 1.8 billion euros.

‘No Great Miss’

“Exiting the U.K. wouldn’t be a great miss for T-Mobile,” said Kempen’s Franssen. “If you look at their position, they’ll have to strengthen it by making investments or do something else.”

Deutsche Telekom, Europe’s second-biggest phone company by market value, said May 9 it’s cutting costs on employees, marketing and advertising in the U.K. as it seeks to boost profitability there amid “a difficult business environment.”

Subscribers to its U.K. services fell 2.6 percent in the year to March 31. The unit was one of only two among Deutsche Telekom’s 16 mobile divisions to post a decline in subscribers, it said in its first-quarter presentation.

To contact the reporters on this story: Simon Thiel in London at sthiel@bloomberg.net; Marcel van de Hoef at mvandehoef@bloomberg.net

Last Updated: June 29, 2009 07:06 EDT