A new research note from Berenberg Bank has estimated that BT’s on-going £12.5bn effort to buy mobile operator EE could in the long-term be good news for investors, but they also predict that it will result in Virgin Media ending their existing Mobile Virtual Network Operator (MVNO) deal with the UK mobile giant.
Berenberg’s note suggests that, by 2018, BT will generate £3.8bn of Free Cash Flow, post-restructuring charges and pre-pension top-up payments (based on a post-EE market cap of £45bn), which they describe as being “one of the most attractive sector valuations“.
But the apparently “conservative” estimate, which also predicts that there will be a £300m to £400m capex ramp at BTOpenreach for “fibre broadband” (FTTC/P) connectivity, is based on an assumption that BT’s buy of EE will ultimately lose them the MVNO revenues from Virgin Media.
The suggestion is that Virgin Media will switch their MVNO away from EE, which if the current developments pan out would leave them with only two options; swap to Vodafone or pick the newly combined O2 and Three UK (assuming the regulators also approve that merger).
The last option seems more logical given that O2 and Three UK don’t have a fixed line base of their own and are thus less of a direct threat, although there’s recently been growing speculation that VM’s parent, Liberty Global, would be willing to engage in a mega merger deal with Vodafone (here). Berenberg’s note seems to support such a deal.
ISPreview.co.uk contacted Virgin Media this morning to find out if the operator has held any discussions with regards to a possible split from EE, although so far the only response has been one of silence. We suspect they wouldn’t want to comment at this stage anyway.
In any case the big unknown in all this continues to rest with the competition review of BT and EE’s deal, not to mention Ofcom’s new strategic regulatory review of the wider market (here). Either one of those could produce a stumbling block for BT’s deal, although Berenberg anticipates that Ofcom won’t be too aggressive; at least not much more so than their recent proposal to open BT’s Dark Fibre up to rivals (here).
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