BT Finalises GBP12.5bn Acquisition of EE’s Mobile Network in the UK

After several weeks of exclusive talks BT has today announced that they’ve “agreed definitive” terms to acquire national mobile operator EE for £12.5bn, which is to be payable as a combination of cash and new BT ordinary shares issued to both of EE’s joint owners Deutsche Telekom (Germany) and Orange (France).

The transaction is naturally still subject to approval by the shareholders of BT and clearance by the relevant regulatory and competition authorities, although short of any problems the process is expected to close by March 2016. Once complete it’s noted that Orange will hold a 4% stake in the new business (plus around £3.4bn in cash) and Deutsche Telecom will hold 12% (plus a seat on the board).

In one fell swoop BT has thus gained itself a significant foothold in the United Kingdom’s mobile market, which will be a huge boost to their plans for re-entering the consumer mobile market this spring with a new range of quad-play broadband, TV, phone and mobile bundles.

EE currently has 31 million customers of which 24.5 million are direct mobile customers (7.7 million use their new 4G network) and today’s announcement also confirms that their BT-based fixed line broadband subscriber base has increased to 834,000 (up sharply by +41,000 in Q4 2014, which is better than the +18k in Q3 and +30k in Q2).

Gavin Patterson, BT’s CEO, said:

“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.

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.”

Olaf Swantee, EE’s CEO, added:

“Joining BT represents an exciting next stage for our company, customers, and people. 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.”

At present EE owns a huge swathe of UK radio spectrum (the largest of any single mobile operator) and its 4G network is significantly more advanced, with superior coverage, than most of their rivals; although Vodafone aren’t too far behind the curve in terms of technology.

Never the less the fact that EE and BT are both considered to be such significant primary players in their respective markets also means that the regulators are much more likely to cast a questioning eye over today’s transaction. At the same time EE is still in the throes of finding its feet after their last merger, which might add some complexity to BT’s acquisition.

Lest we not forget the next question of branding and whether BT will retain the now established EE name, which might help it to seem less dominant, or put its own title on the front. Another interesting result of today’s move might also be that EE’s newly launched broadband TV service looks set to be replaced by BT’s own solution (see below), which risks creating some initial confusion among early adopters.

Meanwhile Three UK are still in final talks to buy O2 (here) and we’re expecting an announcement on that one in the not too distant future, even though we’re not entirely sure that Three’s move makes as much sense as BT’s gobble of EE.

Elsewhere Sky Broadband has just reached an MVNO deal with O2 (here), although their mobile solution won’t be ready until next year, and Vodafone also plan to re-enter the consumer home broadband market this spring in order to tackle BT’s growing dominance. In short, the United Kingdom is about to have one less primary mobile operator and yet another significant telecoms market shake-up.

Key Points from Today’s Sale

• The cash consideration will be financed by a combination of new debt financing and approximately £1bn from the placing of new BT shares. The Equity Placing will be launched in due course.
• Following the Transaction and Equity Placing, Deutsche Telekom will hold a 12% stake in BT and will be entitled to appoint one non-executive member of the BT Board of Directors. Orange will hold a 4% stake in BT.
• BT expects to achieve combined operating cost and capex synergies of around £360m p.a. in the fourth full year post Completion. This is equivalent to a net present value of around £3.5bn before integration costs or around £3.0bn after integration costs.
• BT expects to generate revenue synergies by providing a full range of communications services to the combined customer base. This includes BT selling its broadband, fixed telephony and pay-TV services to those EE customers who do not currently take a service from BT. BT also expects to accelerate the sale of converged fixed-mobile services to BT’s existing consumer and business customers and offer new services, using both companies’ product portfolios, skills and networks. BT expects to generate revenue synergies with a total net present value of approximately £1.6bn.
• The Transaction values EE at a multiple of 6.0x 2014 EBITDA and 9.6x 2014 OpFCF, adjusted for the net present value of the operating cost and capex synergies.
• The Transaction is expected to be accretive to FCF per share in the first full year post Completion. As a result of EE’s high depreciation charge, reflecting historical network investment, the Transaction is expected to be accretive to Adjusted EPS one year later.
• The cash return on investment of the Transaction is expected to comfortably exceed BT’s cost of capital in the third full year post Completion.
• The Transaction is subject to approval by the shareholders of BT and merger clearance, in particular from the UK Competition and Markets Authority. It is expected to complete before the end of BT’s 2015/16 financial year.

The footnote to today’s announcement further reveals that BT’s Transaction is expected to generate “significant operating cost savings and additional capex savings. Together these are expected to reach £360m p.a. in the fourth full year post Completion. Integration costs to achieve these are expected to be around £600m. The savings are equivalent to a net present value of around £3.5bn before integration costs or around £3.0bn after integration costs“. More details of the transaction can be found further down in today’s press release.