Top Story

BT Enters Exclusive Talks with EE

ee

BT Group (BT) announces that, further to its statement on 24 November 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. 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.

The proposed acquisition would enable BT to accelerate its existing mobility strategy whereby customers will benefit from innovative, seamless services that combine the power of fibre broadband, wi-fi and 4G. BT would own the UK’s most advanced 4G network, giving it greater control in terms of future investment and product innovation.

The key headline terms, which are non-binding, include a purchase price of £12.5bn 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% stake in BT and would be entitled to appoint one member of the BT Board of Directors. Orange would hold a 4% stake in BT.

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 24.5m direct mobile customers and reported Adjusted EBITDA of £1,588m for the twelve months to 30 June 2014.

Paolo Pescatore, director, multiplay and media, CCS Insight commented on the proposal, “We consider EE to be a more desirable asset for BT to own than O2 and thus view its move 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.”

Rick Mattila, Telecoms & Industrials Analyst at the securities business of MUFG commented “Interestingly, the biggest impact from the deal announcement may be on names that are not directly involved. Telefonica’s o2 will now face a stronger competitor and we would expect Telefonica to consider other options for the UK business. These include a potential combination with Hutchison’s Three, although this move would likely face material regulatory scrutiny. We also note mentions of a possible combination between Vodafone and Liberty Global as a potential reaction to BT’s move into mobile – we continue to view such a move as logical and even probable.”