U.K. telecoms group BT has announced it is in talks over the purchase of one of two British mobile network operators – O2 and EE. The telecommunications giant, with funds of £2.6 billion ($4.08 billion) and a market capitalization of £31 billion ($48.7 billion), has money to burn. And with the race on to corner Europe’s difficult market with ‘quad-play’ services – broadband, pay-TV, mobile and home phone – BT is aiming to steal ahead of local rivals Vodafone and Sky.
O2, which BT sold in 2005 to Spain’s Telefónica, could be acquired for a deal experts cap at £10bn ($15.7bn), while EE, which is a joint venture of France’s Orange and Deutsche Telekom, would cost fractionally more thanks to its one-eighth-higher EBITDA in 2013. However, a BT statement warned that “discussions are at a highly preliminary stage and there can be no certainty that any transaction will occur.”
Europe’s telco market has stagnated in recent years, leaving quad-play offerings as one of few ways to capture any more meaningful market share. Vodafone’s March purchase of Spanish operator Ono signalled its intent – and BT’s management may have grown wary of Vodafone’s increasing closeness to fellow British giant Sky.
“Mobile and fixed telecom consolidation has been a major M&A theme throughout Europe this year, so it’s not surprising that a major deal is now under discussion in the U.K., which is still a relatively fragmented market,” said Ben Nice, News Editor, TMT Finance. “Currently there are eight separately-owned broadband and mobile operators in the U.K.: four mobile and four fixed broadband. Over the next two to three years we expect this number will reduce to under five in total, with three large quad-play operators dominating the market.”
“With no fixed line presence in the U.K., Telefonica, which has recently made a large acquisition of mobile operator E-Plus in Germany and is targeting a further push into its South American markets, is under some pressure to reconsider its U.K. strategy,” added Nice. “A change of ownership of Orange and Deutsche Telekom’s U.K. mobile joint venture EE is seen as inevitable at some point, and a sale to a strategic player would be more desirable for either owner than an IPO. Both EE and O2 are credible targets for BT.”
Rupert Wood and Chris Nicoll, of London intelligence firm Analysys Mason, claimed the move would be good for BT, bringing the company’s strategy full circle. “It brings back control of the customer to BT rather than dealing with an mobile virtual network operator (MNVO) arrangement with EE that leaves account control in question,” they wrote in an email to Red Herring.
An O2 purchase would also make better use of the 2.6GHz spectrum BT acquired in a 4G auction this year, say Wood and Nicoll. The pair also feel that H3G, branded simply as 3 in the U.K., might be a more likely second candidate than EE.
Charlotte Patrick, research director at Gartner, said that a purchase of O2 may cause issues for BT’s branding: “I would have thought EE would have a lot more in common with BT than O2 because O2 have a typically younger, professional, more high-spending, funky brand. Whereas EE’s is a bit of a muddle.”
But overall, added Patrick, an O2 purchase is good for BT, whose shares jumped 3% this morning on London’s Stock Exchange. “There are economies of scale, some abilities to manage the pricing and the traffic across all your networks,” she said.
As with Vodafone’s Ono buy, today’s news has already fueled speculation BT will continue buying up mobile operators. But BT’s relatively high debt may prohibit further activity, as would Britain’s telco watchdog Ofcom. “We doubt whether Ofcom would go for 4-3 consolidation, and with either EE/O2 or 3/O2 you’d get very complex and potentially asymmetric network and infrastructure shares to unravel,” said Wood and Nicoll.
“There would be knock-on consequences for other fixed-only and mobile-only plays, and it is of course highly likely that the U.K. will shift from its unique position of having effectively separate fixed and mobile operators to one with far more convergence,” they added.