LONDON (Nov 26): Thirteen years ago, BT Group moved away from the wireless market. Now, it needs to get back in, and it could take more than US$15 billion to do it.
The US$50-billion phone company said it’s in very preliminary talks with two mobile carriers, including Telefonica's O2 -- the wireless business that BT spun off in 2001 -- about an acquisition.
EE, the joint venture owned by Deutsche Telekom and Orange SA, is the other provider, a person familiar with the talks said.
Either company would give BT the customer base and network of one of the top two UK wireless providers.
Phone carriers across the UK and Europe are turning to bundled packages, which combine TV, Internet, mobile and wireline service, to increase revenue and discourage customers from defecting.
Almost two-thirds of UK households buy at least some of their telecommunications services together, up from 29 percent in 2005, when Telefonica agreed to buy O2, according to data from regulator Ofcom.
While BT already struck a mobile partnership with EE, buying a network would give it more flexibility on pricing and make it a more formidable competitor.
BT is “the market leader in broadband. Strengthening that with mobile can really give them a competitive edge,” Erhan Gurses, an analyst at Bloomberg Intelligence, said in a phone interview.
Bundling is “increasingly becoming the case across Europe so they don’t want to miss the train.”
EE and O2 are each valued at more than US$15 billion by Macquarie Group.
Wireless slowdown
When BT spun off O2 in 2001, the industry was in the process of spending billions for the rights to newer, faster third-generation wireless networks.
Rather than bear that burden itself, BT decided to separate from the wireless unit and let it finance its expansion with its own stock.
In the years that followed, the industry was hit by competition that held down prices for those faster networks, regulation that limited cash sources like roaming charges and the emergence of cheaper new services, such as the WhatsApp messaging application.
“We used to make reasonably good revenue growth each year, and that’s why Telefonica bought us, and the market has just slowed to a crawl,” said Charlotte Patrick, a former O2 manager who now works for researcher Gartner.
“Revenues have just gone out of the market.”
Combining services
The emphasis has since shifted to retaining customers.
One way to do that is by bundling phone, Internet and TV into one package, and that means providers need to buy whichever of the three they don’t have.
Deals for European telecommunications and cable-TV companies have already totalled more than US$95 billion this year.
That’s the most since 2005, when Telefonica’s purchase of O2 was the industry’s top announced transaction of the year.
BT will need to join in if it wants to remain competitive.
Mobile partnerships, such as its deal with EE, will only get it so far.
Owning its own mobile network will give BT access to stores, branding, and deals with phone makers such as Apple and Samsung Electronics to sell the most popular devices.
“You need the networks to actually deliver,” said Steven Hartley, an analyst at London-based Ovum research.
“It makes sense that between fixed and mobile you’ll start to see more of these things coming together.”
EE appeal
Investors like the idea of an acquisition.
BT jumped 3.7 percent yesterday in London trading after the company said it was in “highly preliminary” talks about buying a wireless operator. That’s the biggest gain in more than 14 months.
The question is whether BT will take back O2 or strike a deal for EE.
Strategically, EE may offer better assets.
EE, the UK’s biggest mobile operator by customers, was the first to roll out high-speed fourth-generation networks in the country and RootMetrics says it has the highest quality service.
EE also has large spectrum holdings and is already transitioning to a converged model on its own.
“EE is bigger from a customer perspective and has more spectrum,” Guy Peddy, an analyst at Macquarie in London, said.
“Spectrum is your long-term determinate” of success in mobile as demand for data continues to rise.
On the other hand, O2 still offers scale as the No. 2 mobile carrier by customers in the UK and is probably cheaper.
EE’s shareholders are discussing selling the company, which may be valued at as much as US$19 billion, people familiar with the matter have said.
Peddy valued EE closer to US$17 billion, and said O2 could command about US$16 billion.
Citigroup analyst Simon Weeden estimated O2 had an enterprise value of 9.4 billion pounds, or US$15 billion.
“In terms of which acquisition would be better for BT, I think the primary factor is price,” Michael Knott, a managing director in the corporate finance segment of FTI Consulting, said in a note.
“Essentially, this is a good thing for BT, the market and, ultimately, customers.”