Bloomberg
As BT Group seeks to return to the mobile-phone market, Britain’s former telecommunications monopoly is encountering an unexpected bonus: the country’s two biggest wireless providers are competing for its attention.
That could mean lower prices and more favourable terms for the London-based acquirer, said Stephane Beyazian, an analyst at Raymond James. BT may reach a decision to start exclusive talks with Telefonica – the owner of carrier O2 - or with Deutsche Telekom AG and Orange, which jointly control EE, as early as this weekend, people familiar with the matter said, asking not to be named because the deliberations are private.
“There’s a need for consolidation in the UK market and everyone wants to move,” Beyazian said. “BT has some flexibility on price in this case, because there are at least two potential sellers.”
Assuming a valuation of 7 times the targets’ adjusted earnings before interest, taxes, depreciation and amortisation, O2 is worth £9.4bn ($15bn) and EE £11bn, according to estimates by Citigroup analysts.
Representatives for BT, Madrid-based Telefonica and Paris- based Orange declined to comment on the talks. A spokesman for Bonn-based Deutsche Telekom didn’t return calls seeking comment.
BT, which said last month it had received expressions of interest from the owners of two UK carriers for a deal, is eyeing wireless targets so it can sell fuller service packages to help boost phone bills and retain customers. BT has become popular because it controls the country’s biggest fibre network.
Without a deal, Telefonica, Orange and Deutsche Telekom would be left lacking a nationwide broadband network to offer bundles of mobile, Internet and TV services in the UK
BT currently favours buying O2 from Telefonica because a single, eager seller makes it an easier deal to negotiate, people familiar with the matter said this week. EE would offer BT a stronger wireless network and customer base, although its dual-shareholder setup is complicating talks, the people said.
No final decision has been made and BT could still decide to opt for a transaction with EE, they said.
Billionaire Li Ka-shing’s Hutchison Whampoa Ltd is also considering whether to pursue a deal for its UK mobile unit Three, which trails EE, O2 and Vodafone Group by customers, people familiar with the situation have said. If Three decides to make an acquisition, that would mean the “one-buyer situation” won’t persist, Beyazian said.
Deutsche Telekom and Orange have been debating what to do with their four-year-old venture. In January, they agreed to freeze talks over an initial public offering of EE as executives worried about the impact the service-bundling trend would have on the market.
EE has started selling broadband service through a wholesale arrangement with BT, while BT had planned to extend its mobile service - currently available to businesses through a resale agreement with EE - to consumers next year.
BT has been expanding its own TV offers, bidding against Rupert Murdoch’s Sky for the most popular soccer matches and buying out ESPN’s channel in the UK last year. That put BT in a stronger position to offer so-called quadruple-play packages.
For Telefonica, a sale of O2 would generate proceeds to repay some of its €60bn ($75bn) in debt as it tries to maintain its ratings, said Carlos Winzer, an analyst at Moody’s Investors Service, which ranks the company’s debt at Baa2, the second-lowest investment grade.
Telefonica could also use the money to help fund takeovers in the faster growing Brazilian market.
BT’s expansion plan has sparked talks across the UK as other carriers looked for ways to defend their positions. Besides Hutchison, Vodafone is also considering its options, including a combination with Liberty Global, which runs the Virgin Media broadband and TV business in the country, people familiar with the matter have said.