UK telco BT has announced that, further to its statement on November 24th 2014, it has entered into an exclusivity agreement with Deutsche Telekom and Orange in relation to BT’s possible acquisition of all of their UK mobile business, EE, a move that significantly enhances its ability to provide a quad-play offering.
The period of exclusivity will last several weeks allowing BT to complete its due diligence and for negotiations on a definitive agreement to be concluded.
BT says the proposed acquisition would enable it to accelerate its existing mobility strategy whereby customers will benefit from innovative, seamless services that combine the power of fibre broadband, WiFi and 4G. BT would own the UK’s most advanced 4G network, giving it greater control in terms of future investment and product innovation.
While continuing these exclusive discussions, BT will progress its own plans for providing enhanced fixed-mobile converged services for businesses and consumers, in line with previous announcements. It remains confident of delivering on these plans should a transaction not take place.
The key headline terms, which are non-binding, include a purchase price of £12.5 billion for EE on a debt/cash free basis. The consideration for EE will be payable as a combination of cash and new BT ordinary shares issued to both Deutsche Telekom and Orange. Following the transaction, Deutsche Telekom would hold a 12 per cent stake in BT and would be entitled to appoint one member of the BT Board of Directors. Orange would hold a 4 per cent stake in BT. In considering the financing of the cash element, BT has a range of options and is mindful of the importance of maintaining a conservative financial profile.
BT expects significant synergies mainly through network and IT rationalisation, back-office consolidation and savings on procurement, marketing and sales costs. In addition, BT expects to generate revenue synergies through selling fixed-line services to those EE customers who do not currently take a service from BT, and by accelerating the sale of converged fixed-mobile services to BT’s existing consumer and business customers.
The exclusivity agreement does not require the parties to enter into a transaction and there can be no assurances that one will occur. If a transaction is agreed, approval by BT’s shareholders will be required as a condition of the purchase.
EE has 24.5 million direct mobile customers1 and reported Adjusted EBITDA of £1.588 billion for the twelve months to 30 June 2014.
A further announcement will be made as and when appropriate.
BT’s November 24 announcement followed speculation relating to a potential transaction involving cellco Telefónica UK (O2) in the UK, the business it sold to the Spanish telco in 2005 for £18 billion (€22bn). It confirmed that it was in discussion with two UK operators, one of which was O2.
Deutsche Telekom and Orange, the joint shareholders of EE, subsequently confirmed they were in discussions with BT.
Paolo Pescatore, director, multiplay and media, CCS Insight, said EE was a more desirable asset for BT to own than O2 with the initiative being seen as as a major statement of intent regarding its multi-play aspirations. “EE has a more developed 4G network and has more mobile subscribers than any other UK operator. This offers a significant and highly attractive target market for BT to cross-sell fixed-line services to. Furthermore, the purchase builds on the existing close links between the two companies.”
“More importantly however, it removes a converged rival from the market. Given that EE had multi-play aspirations of its own, BT will now face one fewer competitor.”
“However, we see the deal as more complicated and time-consuming and thus consider it as a more risky option. In particuar, the deal will be subject to more stringent regulatory hurdles than buying O2. It combines the UK market-leader in fixed-line with the number one mobile operator. We believe it is unlikely that Ofcom would block the deal, but the combined entity could be forced to dispose of some spectrum. The regulator could also mandate the demerger of either of both of BT’s Openreach and Wholesale units.”
“Furthermore EE is owned by two companies that haven’t always agreed unanimously on strategy for EE – this could make the deal more time-consuming to complete. EE is also still in the process of consolidating a complicated mix of networks, brands and back-office systems. The deal to buy O2 wouldn’t have involved this level of complexity.”
“BT’s move reflects the company’s strong ambitions in multi-play and serves as a clear warning to UK rivals, notably Vodafone, Sky and Virgin Media. These companies will be forced to review their position as the market for convergence in the UK rapidly comes to the boil.”
“Buying EE will enable BT to cross-sell broadband and TV services to “new” mobile customers. If marketed and positioned effectively, BT could secure subscribers for many years to come. Another major benefit is that it would gain immediate access to an extensive retail network. We consider BT’s absence from the high street a major weakness given that articulating the merits of a multiplay service are best done in person at the point of sale.”
“As the only pure-play mobile operators remaining in the UK, 3 and O2 could become vulnerable if UK consumers embrace multi-play. BT’s move opens the market up for further potential consolidation involving these companies.“