BT enters into exclusive talks on £12.5B deal to buy EE

BT has entered into exclusive negotiations with Orange and Deutsche Telekom regarding the sale of EE, ending weeks of speculation over whether the former UK incumbent would choose to buy EE or its rival O2 UK.

In a statement, BT said the period of exclusivity would last several weeks, allowing it to complete its due diligence and for negotiations on a definitive agreement to be concluded.

The purchase price of £12.5 billion (€15.7 billion/$19.6 billion) would be split equally between Orange and Deutsche Telekom, according to statements from the two operators, which each hold a 50 per cent stake in EE.

A part of the purchase price will be paid in BT shares. Under the terms of the general agreement reached today, Deutsche Telekom would hold a 12 per cent stake in BT upon successful completion of the proposed transaction. Orange would hold 4 per cent stake and the remaining payments would be made in cash.

Thomas Dannenfeldt, EE's chairman and CFO of Deutsche Telekom, said the proposed transaction with BT offers EE the chance to take part in the "outstanding opportunities of an integrated business model".

"We firmly believe that convergence is the future of telecommunications in Europe. Customers want fixed-mobile converged services from a single provider," Dannenfeldt said in DT's statement.

 BT said the proposed acquisition would enable it 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."

Even before it started exploring a possible acquisition of a mobile network, BT had been planning to re-enter the UK mobile market through a mobile virtual network operator (MVNO) deal with EE and its own indoor small cell network.

If the EE deal goes ahead, BT said it would own the UK's most advanced 4G network, and would have greater control in terms of future investment and product innovation. The operator added that it expects to gain 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 have service from BT, and by accelerating the sale of converged fixed-mobile services to BT's existing consumer and business customers.

While Monday's agreement does not guarantee that a transaction will definitely go ahead, it does show that BT has chosen the option that is likely to bring it greater value in the long term but could also potentially be a more complex transaction.

"In our view, EE would represent a more attractive asset for BT. However, a deal for O2 would be more straightforward, less expensive and likely to encounter fewer regulatory hurdles," said CCS Insight in a research note from early December.

"It's a very smart move from a strategic point of view to launch quad-play, and they picked an asset they know the value of very well," Vincent Maulay, an analyst at Oddo & Cie. in Paris, told Bloomberg.

It has also been speculated that once BT made its move, Hutchison Whampoa could seek a deal with Telefónica to buy O2 UK in order to shore up Three UK.

Meanwhile, Vodafone UK is also considering how it will respond to the increased threat from BT, although the company has played down reports it might consider buying Liberty Global to boost its own convergence strategy.

BT last competed in the UK mobile consumer market in 2002, when its BT Wireless unit sold services under the BT Cellnet brand. BT Wireless was demerged in 2002 and renamed as "mmO2," later changing to simply "O2." Telefónica acquired O2 in 2005 in a £17.7 billion deal.

For more:
- see this statement from BT
- see this Bloomberg article

Related Articles:
Report: BSkyB hires advisers in reaction to BT merger moves
Reports: Vodafone mulls Liberty Global move as it considers UK options
Rumour Mill: Hutchison mulls bid for EE or O2 UK
BT, O2 and EE: kickstarting UK consolidation?
BT confirms talks with 2 mobile network operators including O2

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