Deutsche Telekom and France Telecom have launched exclusive talks to merge their British mobile units in a joint venture that would grab the top spot in the cut-throat UK market.

The partners plan to reach an agreement by the end of October, Deutsche Telekom said If the talks succeed, the deal would remove one of five operators from the crowded market and help relieve intense competition.

Merging Deutsche Telekom’s T-Mobile UK with France Telecom’s Orange UK is expected to generate synergies worth more than $5.74 billion, the German group said. The transaction should boost free cash flow per share from 2010 and earnings per share from 2011.

Gervais Pelissier, France Telecom’s finance chief, told French radio station BFM that the deal made sense given the competitiveness of the British market. “Five licenses in the UK was too many, and even with four, it still might be too many. The trend is toward consolidation and the reduction of the number of operators,” Pellissier said.

Deutsche Telekom chief executive Rene Obermann said earlier this year that he was considering all options for the struggling UK unit, but as any consolidation in the UK market will likely draw the attention of regulators, analysts say a direct sale might not have commanded a sufficiently attractive price. The venture puts to rest speculation about a sale to Vodafone or Telefonica’s O2, which has about 27 per cent of the market in Britain. It is followed by Vodafone with 25 per cent, Orange with 22 per cent, T-Mobile with 15 per cent and Hutchison Whampoa’s 3 UK with 8 per cent.