BT agrees to terms to acquire mobile operator EE for stg£12.5bn

5 Feb 2015

UK telecoms giant BT has agreed to definitive terms to acquire 4G mobile operator Everything Everywhere (EE) from Orange and Deutsche Telekom for stg£12.5bn.

EE is the second largest mobile operator in the UK with 31m customers, of which 24.5m are direct mobile customers and 834,000 are fixed customers. It has the largest 4G customer base of any operator in Europe.

In related news Spanish telecoms player Telefonica is in talks with a view to selling O2 to Hutchison Whampoa for stg£10.2bn.

BT will buy EE through a combination of shares and stg£1bn of cash, which will be raised through debt financing and the placing of new BT shares.

After the transaction Deutsche Telekom will have a 12pc stake in BT and a seat on the board while Orange will have a 4pc stake in BT.

The acquisition is aimed at giving BT a strategic and tactical advantage in competitive UK broadband market by having a state-of-the-art fibre network interconnected with a next generation 4G network.

BT famously sold its original mobile arm O2 to Telefonica in 2005 for stg£18bn, criticised by many in the telecoms industry as a strategic blunder of epic dimensions.

BT expects combined operating cost and capex synergies of around stg£360m a year four years after the acquisition has been completed.

It expects to generate revenue synergies with a total net present value of stg£1.6bn.

BT to accelerate mobility plans

“This is a major milestone for BT as it will allow us to accelerate our mobility plans and increase our investment in them,” said BT CEO Gavin Patterson.

“The UK’s leading 4G network will now dovetail with the UK’s biggest fibre network, helping to create the leading converged communications provider in the UK. Consumers and businesses will benefit from new products and services as well as from increased investment and innovation.

“The deal provides an attractive opportunity for BT to generate considerable value for shareholders, with significant operating and capital investment efficiencies supported by our tried and tested cost transformation activities. The enlarged BT will offer significant opportunities for employees as we lead the creation of a world-class digital infrastructure for Britain,” Patterson added.

The acquisition is subject to approval by BT shareholders and the UK Competition and Markets Authority and it is expected to be completed by the end of BT’s 2015/2016 financial year.

“Joining BT represents an exciting next stage for our company, customers, and people,” EE chief executive Olaf Swantee said.

“In the last few years alone, we have built the UK’s biggest, fastest and best 4G network, significantly advancing the digital communications infrastructure for people and businesses across Britain. Today’s announcement will ensure the UK remains at the forefront of the mobile revolution, bringing even more innovation and investment in world leading connectivity for our customers.”

Regulatory hurdles

Ovum analyst Matthew Howett believes BT will have to overcome regulatory issues before the acquisition gets the green light.
“At this point in time, things generally look promising and the green light is likely to be given, albeit with concessions needed. One of those is likely to address the combined entity’s spectrum holding. BT was particularly successful in the 2013 4G spectrum auction, acquiring spectrum at 2.6GHz, and the inquiry is likely to assess what adding this to EE’s already sizable lot will mean.

“What potentially complicates things is the planned acquisition of O2 by Three – it is not yet clear whether issues arising from that will be considered by the CMA separately or as part of this review. A combined Three and O2 would have a concentration of the lower-frequency spectrum (ideal for providing coverage), but would have no higher-frequency spectrum at 2.6GHz, which is needed for capacity given consumers’ insatiable appetite for data. If both transactions are to conclude, there could be a reorganization of spectrum holdings between the two enlarged operators.

“The other concession likely to be needed concerns mobile backhaul. Other UK mobile operators are already calling for guarantees that the wholesale products BT currently provides for backhauling traffic will be offered on a nondiscriminatory basis. This issue could be resolved if all of the relevant products currently provided by BT Wholesale move into the BT Openreach division, which is already obligated to provide access on a nondiscriminatory basis. This solution is on the radar, and Ovum understands that Ofcom has been considering it since November of last year. Given the importance of these inputs to other mobile operators, a firm guarantee will be needed,” Howett said.

BT Tower in London image via Shutterstock

 

John Kennedy is a journalist who served as editor of Silicon Republic for 17 years

editorial@siliconrepublic.com