BT has agreed to definitive terms to buy mobile operator EE from existing owners Orange and Deutsche Telekom for £12.5 billion (€16.7 billion/$19 billion), bringing to an end the first phase of a process that is set to turn the former UK incumbent into the market's biggest converged provider of fixed and mobile telecoms services.
The move, which has been expected since BT entered into exclusive negotiations with the German and French telecoms behemoths last December, will have wider repercussions for both the UK market and the "quad-play" trend that is rippling across Europe and changing the strategies of both fixed and mobile players as they seek to combine fixed broadband, TV and mobile services into packages that attract and retain consumers.
"Fixed-mobile substitution is dead," proclaimed Rupert Wood, principal analyst at Analysys Mason. "In the past, mobile business was based on the idea that it would gradually replace fixed. This is not happening, and the rise of connected TV makes it impossible. Mobile alone cannot make further great inroads into the consumer data market."
The business combination is set to make BT the number one integrated provider of fixed network and mobile communications in the UK: In the 2013/14 financial year (to Mar. 31, 2014), the company generated revenue of £18.3 billion and an adjusted EBITDA of £6.1 billion. EE currently has more than 30 million customers and in 2014 generated revenue of £6.3 billion with an adjusted EBITDA of £1.6 billion.
"This is a major milestone for BT as it will allow us to accelerate our mobility plans and increase our investment in them. 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," said BT CEO Gavin Patterson.
Upon closing--which is expected to take place before March 2016--Deutsche Telekom will become the largest shareholder in BT with a stake of around 12 per cent. Orange said it will receive around £3.4 billion in cash and a 4 per cent stake in the combined BT/EE entity, but added that the final amount of cash will be subject to customary adjustments at the time of closing.
BT plans to finance the deal through a £1 billion share issue and debt. Reuters noted that investors welcomed the deal, sending BT shares to a 14-year high.
For Orange and Deutsche Telekom, the deal means they will be able to exit their UK mobile business and focus on their own converged offerings in other markets.
"The big operators are divesting mobile-only plays," said Wood. "Turn 180 degrees, and you see the latest example of a phenomenon across Europe. The sale of EE is the last stage in major multinational operators Deutsche Telekom and Orange divesting their stakes in mobile-only operators. Telefónica has done the same [and is currently in talks with Hutchison Whampoa on the sale of O2 UK), and Vodafone has been busily buying up fixed operators. Vodafone UK is likely to re-enter the fixed market this month, but its moves in other European markets have been dramatic."
Matthew Howett, practice leader for regulation at Ovum, said with the due diligence now complete and financing in place, attention now turns to getting the necessary regulatory clearance from UK competition authorities.
"BT anticipates that the transaction will need to be cleared by the Competition and Markets Authority (CMA). Depending on whether or not remedies are required, that process could last between eight and 32 weeks. The operator does not expect clearance from the [European Commission] to be required," Howett said.
Howett thinks that the deal is likely to be cleared, but said some concessions will be required. For example, he cites the spectrum holdings of the future combined entity given that BT also acquired 2.6 GHz licences in the 2013 LTE spectrum auction. He also pointed to concerns about 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 non-discriminatory basis.
"What potentially complicates things is the planned acquisition of O2 by Three," added Howett. '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 2.6 GHz, which is needed for capacity given consumers' insatiable appetite for data. If both transactions are to conclude, there could be a reorganisation of spectrum holdings between the two enlarged operators."
A combined BT/EE also has considerable implications for Vodafone UK, which faces competition from a growing number of fixed players including TalkTalk and Sky as they seek to add mobile to their service mix. On Thursday, Vodafone Group reported improved progress in Europe during its financial third quarter (to the end of December 2014), and also said that its UK business returned to growth in the quarter.
"Having reported improved numbers in the UK market, Vodafone must now confront the fact that, with today's BT's EE acquisition news plus Telefónica's proposed sale of its O2 network in the UK to Hutchison Whampoa, it might end up as the UK's smallest operator in the UK--and a 'mobile only' operator at that. The onus therefore is on Vodafone to step up its efforts to become a triple or quad play operator in its home market," said Bengt Nordstrom, CEO of independent mobile strategy consultancy Northstream.
Looking further ahead to after the closing of the deal, BT and EE face considerable challenges in determining how to target customers and package services, as well as which brand to use.
Peter Briggs, senior analyst at Current Analysis, noted that BT also needs to iron out the details of converging its planned "inside-out", MVNO/4G/Wi-Fi hybrid service with EE's mainstream 4G LTE network.
"If approved and when completed, likely between Q3 2015 and Q1 2016, BT will bring the mobile network in-house, enhancing the operator's initial return to consumer mobility based on an EE MVNO, augmented by small-cell LTE and WiFi. Ownership and control of a combined fixed and mobile network should then allow BT to develop more seamless and innovative data connectivity services for consumers, wherever they are," Briggs added.
He noted that the acquisition will produce a very significant short-term consumer market impact by providing BT with a well-established 4G mobile network and customer base, alongside further opportunities for service integration and synergies that EE would have struggled to achieve alone.
"Both BT and EE consumer customers can expect a flurry of bundling, discounting and sharing deals to identify, retain and grow those BT/EE 'customer households'. Rather than simplifying choice in the months ahead, UK consumers can expect a proliferation of quad-play offers," Briggs concluded.
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