Taiwan’s third largest cellco Far EasTone [TWO: 4904] has confirmed that it is to take control of smaller rival KG Telecom in a cash and share deal valuing the operator at TWD31 billion. The two companies yesterday signed a letter of intent that will see the merged company overtake state-run Chunghwa Telecom to become the second-biggest player in the country’s crowded mobile market with around 7.7 million users. The impetus behind the deal is a need to cut costs in preparation for an expensive 3G rollout in the first half of next year. KG shunned the government’s 3G licence auction in 2002, complaining that the prices were set too high. But now, with the market stagnating in a country which has more mobile phones than it does people, operators are looking to high speed, higher revenue 3G services as a means to boost spending amongst existing customers. KG is the weakest of the country’s operators and has been in desperate need of a licensed partner. It posted a loss of TWD1.19 billion in 2002 and despite a recent turnaround in performance – including a savvy alliance with Japanese giant NTT DoCoMo [NYSE: DCM] that has seen its bottom line grow 10% this year – the telco has been actively courting suitors for the past twelve months. According to local press reports, KG will be moved under the FarEasTone brand, controlling 23% of its parent’s shares and retaining several seats on the board.