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 U.K. market.

The partners plan to reach an agreement by the end of October, Deutsche Telekom said on Tuesday. 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 U.K. with France Telecom's Orange U.K. is expected to generate synergies worth more than €4 billion ($5.74 billion), the German group said.

The transaction should boost free cash flow per share from 2010 and earnings per share from 2011, it added.

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 U.K. 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 U.K. unit, but as any consolidation in the U.K. market will likely draw the attention of regulators, analysts say a direct sale might not have commanded a sufficiently attractive price.

The 50:50 joint venture puts to rest speculation about a sale to Vodafone or Telefonica's O2.

O2 has about 27% of the market in Britain, followed by Vodafone with 25%, Orange with 22%, T-Mobile with 15% and Hutchison Whampoa's 3 U.K. with 8%.

Deutsche Telekom estimated that operating cost savings should reach an annual £445 million ($729 million) from 2014 onwards.

The venture would incur £600 million-800 million in integration costs from 2010 to 2014, Deutsche Telekom said.