BT, O2 and EE: kickstarting UK consolidation?

It's been evident for some time that BT badly wants to get back into the mobile market. The former UK fixed-line incumbent signed a mobile virtual network operator (MVNO) deal with EE in October 2013, and since then has laid out its plans to enter the consumer mobile market, in part, by building a small cell network in or close to homes.

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 (€22.3 billion/$27.9 billion) deal.

Whether BT now rues the day it sold O2 is a moot point; it now knows it needs a mobile strategy, and has confirmed it is in "highly preliminary" talks with O2 and one other operator, which Orange and Deutsche Telekom on Wednesday confirmed is EE. Rumours abound that BT could offer €6 billion plus a 20 per cent share in its share capital for O2 UK, meaning that the total deal for Telefónica could amount to around €14 billion. However, other sources told Reuters that this valuation was "surreal".

If BT does buy O2 or EE, there is a fair chance that its strategy to roll out a small cell network, building what some term as an "inside out" mobile network, may be put on hold.

Rupert Wood from Analysys Mason noted there are some real cost saving benefits to be made from home femtocells or small cells. However, if BT were to acquire O2, for example, its strategy would most likely change.

"The opportunity to buy a mobile network does not come up all the time," Wood said. He added that an acquisition fulfils the more urgent need for a mobile market entry, while small cells would make more sense in the longer term.

Imran Choudhary, senior analyst at Kantar Worldpanel, noted that BT has struggled to move into mobile in the past. "Acquiring one of the largest networks in the country would give it instant access to an established customer base, allowing it to tap into and cross-sell its internet, TV and landline packages. O2 would be a good fit as nearly a third of its customers already source their home broadband from BT," Choudhary said.

Of course it's far from a done deal that BT will acquire O2 or EE. Indeed, BT is also unlikely to be the only operator sniffing around the two mobile networks.

However, even if a BT deal does not go ahead, an inflection point has now been reached in the UK market, said Wood. "Maybe the real action starts here on consolidation," he said, noting that the UK is in the rather unusual position in Europe of having very separate fixed and mobile players.

Telefónica is certainly interesting in exploring options for its O2 UK unit as the Spanish giant looks to withdraw from markets where it has a mobile-only presence and focus on a converged strategy in Spain and Latin America. EE's parent companies, Orange and Deutsche Telekom, are also openly considering various options for their UK unit.

Watch this space, as the saying goes.--Anne

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