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O2 UK Rejected – BT Confirm EE Selected as Exclusive Acquisition Target

Monday, December 15th, 2014 (5:17 pm) - Score 4,952

National UK telecoms giant BT has this afternoon moved to bolster their plans for launching a new consumer 4G mobile service in Q2-2015 by confirming that they’ve entered a period of exclusive talks to buy EE (Everything Everywhere) from joint owners Deutsche Telekom (Germany) and Orange (France) which, unless there are complications, effectively rules out a deal with O2.

The smart money was initially focused on BT making an offer for O2, which would have been a few billion pounds cheaper, easier (i.e. a single owner in Telefonica vs EE, which is still in the process of post-merger restructuring) and is unlikely to have attracted as much regulatory scrutiny as an EE deal probably will (i.e. EE owns a lot of radio spectrum and one dominant Telco buying another dominant Telco often raises competition concerns). Not to mention that O2 started life well over a decade ago as a Joint Venture between BT and Securicor (aka – BTCellnet / mmO2).

On the flip side EE’s 4G network is significantly more advanced and has superior coverage, not to mention that they’ve already established a Mobile Virtual Network Operator (MVNO) partnership with BT to launch the new 4G network. By comparison a purchase of O2 would have complicated BT’s current consumer mobile timescale and might have meant further delays due to the change of platform and added administrative hassle on top.

BT Statement

The period of exclusivity will last several weeks allowing BT to complete its due diligence and for negotiations on a definitive agreement to be concluded.

The proposed acquisition would enable BT 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. BT would own the UK’s most advanced 4G network, giving it greater control in terms of future investment and product innovation.

While continuing these exclusive discussions, BT will progress its own plans for providing enhanced fixed-mobile converged services for businesses and consumers, in line with previous announcements. It remains confident of delivering on these plans should a transaction not take place.

The key headline terms, which are non-binding, include a purchase price of £12.5bn for EE on a debt/cash free basis. The consideration for EE will be payable as a combination of cash and new BT ordinary shares issued to both Deutsche Telekom and Orange. Following the transaction, Deutsche Telekom would hold a 12% stake in BT and would be entitled to appoint one member of the BT Board of Directors. Orange would hold a 4% stake in BT. In considering the financing of the cash element, BT has a range of options and is mindful of the importance of maintaining a conservative financial profile.

BT expects 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 take a service from BT, and by accelerating the sale of converged fixed-mobile services to BT’s existing consumer and business customers.

The exclusivity agreement does not require the parties to enter into a transaction and there can be no assurances that one will occur. If a transaction is agreed, approval by BT’s shareholders will be required as a condition of the purchase.

EE has 24.5m direct mobile customers1 and reported Adjusted2 EBITDA of £1,588m for the twelve months to 30 June 2014.

It’s worth pointing out that BT’s MVNO hook-up with EE came at the cost of their previous agreement with Vodafone. Since then Vodafone has responded by pledging to re-enter the fixed line broadband market next spring 2015 and separately Sky Broadband are also looking to offer a mobile solution (here), which looks set to be supplied by Vodafone.

Vodafone has also been spotted sniffing around almost every fixed line ISP in the market, although Virgin Media (Liberty Global) is believed to be the more attractive target for them. Separately Three UK had also expressed an interest in buying either EE or O2, although clearly one of those options now looks to be off the table.

In any case today’s preliminary deal makes a lot of sense. In one fell swoop BT could soon secure itself a significant position in the United Kingdom’s mobile market. Big quad-play providers are nothing new around Europe, although consumer appetite for such services in the UK remains more uncertain territory.

So what happens next? No doubt this will put pressure on Vodafone, Sky Broadband and Three UK to finalise their future direction(s). Vodafone in particular will need to stop dithering and make a decision about their future, while the same goes for Sky. Meanwhile Three UK’s parent could purchase O2, but their current position in the market is unique enough that they could equally afford to simply ride out the storm.

On top of that Sky, Virgin and Vodafone have all hinted that they plan to oppose BT’s deal through the usual regulatory channels and appear to suggest that today’s move will give the fixed line giant too much market power. The operators are perhaps banking on the fact that similar regulatory pressure played a part in forcing BT to demerge Cellnet all those years ago, although today’s market is very different.

Otherwise it remains unclear whether or not EE will adopt BT’s branding or operate the business at arms-length, much like they appear to do with sibling PlusNet. Others may also question why BT is willing to do such a huge deal for mobile (we of course note that it’s on a debt/cash free basis), yet they’ll only take a smaller risk (i.e. without recourse to state aid) in order to bring fixed line superfast broadband connectivity to 100% of the country.

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Mark Jackson
By Mark Jackson
Mark is a professional technology writer, IT consultant and computer engineer from Dorset (England), he also founded ISPreview in 1999 and enjoys analysing the latest telecoms and broadband developments. Find me on Twitter, , Facebook and Linkedin.
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19 Responses
  1. Avatar robert scriven says:

    No doubt the line rental for houses will go up and up and up , to pay for this, and the premier league rights.

  2. Avatar adslmax says:

    BT are evil as hell in UK

  3. Avatar FibreFred says:

    “Others may also question why BT is willing to do such a huge deal for mobile” maybe they expect it to pay back a lot quicker.

    Anyway, good move by BT, quad play is needed to compete now

  4. Avatar gerarda says:

    Phew I am glad I signed up with O2 and not EE, so escaping having to deal with BT’s lack of customer service department

  5. Avatar finaldest says:

    If BT gobble up EE then I am off.

  6. Avatar VladTheImpaler says:

    If BT gets approval to buy EE then I wonder what would happen to Virgin Mobile?

    They would essentially be running on their competitors network.

  7. Avatar GNewton says:

    This is still in the early stages, and hopefully BT will fail in this. But this demonstrates that BT should have never received 1.7 Billion Pounds from taxpayer’s money. It is NOT a charity, though it often acts like a poor beggar.

  8. Avatar dragoneast says:

    BT is a commercial company. The deal makes commercial sense. It could also be good for customers in terms both of bringing superfast services across the country by combining fixed and 4G, and in terms of investment. And is as likely as any other option to keep prices competitive, where the regulators can perhaps have some input. The problem is getting the investment with the pricing pressures upon consumers. This surely helps, not hinders, that objective. But there are many hurdles. Brave BT. But doing, I think, the right thing for the UK. What’s the alternative?

  9. Avatar david says:

    glad they didn’t get o2 as would have moved asap !!!

  10. Avatar Tim says:

    This might be the kick the other networks need to accelerate their 4G roll out… it’s taken far too long already!

    I’m pleased that BT chose to go for EE as I don’t use EE, I do however use O2.

    What is needed now is for the other operators to push land line replacing 4G services, like Relish (PCCW) has done in London. Kill the need for a land line and BT will be hit where it hurts the most.

  11. Avatar DTMark says:

    Just when you think customer service couldn’t be much worse, the country’s perhaps second most inept operator is potentially to be bought by the country’s most inept operator.

    If this goes ahead, maybe BT stand a chance of actually fulfilling some of those targets in the BDUK project.

    This will enable BT to create a compelling offer given that “data anywhere any time” is the way forward.

    It’s also another nail in the coffin for smaller ISPs who in the end will simply serve just a few business customers.

    1. Avatar dragoneast says:

      I think many small ISPs are doing nicely, thank you. There is a place for those who want a refuge from double/triple/quad play, or whatever; or who just don’t want to play. It’s about adapting to the market, for everybody.

    2. Avatar DTMark says:

      I wouldn’t personally place all of my services with the same business.

      But, people seem to want to. Price wins over quality in this country (not just broadband).

      The way forward could be that you pay for internet access and it works no matter where you are or what the device or connection mechanism is. I can see that being attractive and to do that, a major player would need to buy a mobile network..

      Though I think people should perhaps be careful what they wish for. In our situation, I could see us having to downgrade to Three if BT did what I’d do – which is to price the 4G service so prohibitively if taken independently, that you’d have to have all four services with them.

    3. Avatar dragoneast says:

      This all-in-one is tempting though. I got a £5 discount when renewing my mobile contract and the £10 reduction with their VDSL would more than halve the bill, and reduce my fixed line costs from those currently with a small provider too. It’s all economies of scale like the supermarkets and the High Street shops in the 80s. And really the internet food is becoming the same too.

  12. Avatar dragoneast says:

    Just, perhaps, it might make the spin-off of Openreach (and possibly Wholesale) marginally more likely, to appease the regulators? Whether that will improve anything is a moot point, but at least everyone’s theories could be put to the test. I doubt though than anyone with sense in Government (there must be a few) would want to jeopardise BT’s R&D though.

  13. Avatar ShadyCreek says:

    This is a good move for BT. The EE network is more modern and mature (than O2), and gives them a good opportunity to Quad Play without having to invest more billions bringing a cellular network up to standard. This will be Quad Play “with knobs on” since the opportunities for properly integrating those services have so many possibilities. This isn’t just about offering four discreet products any more, and since no one else is excelling at the integration there’s a big opportunity here.

    Given EEs current shocking levels of customer service (not to mention arrogance) it’s hard to imagine things any worse. Certainly the service I get from BT is significantly better than any interaction with EE at the moment.

  14. Avatar Phil Coates says:

    I suspect this may help BT to provide the USC to areas currently not benefitting from the first couple of phases of the BDUK rollout of ‘Superfast’. For those of us just looking forward to 2Mbps in 2016 4G would provide that and more – as long as the price and data limits aren’t ridiculous.

  15. Avatar NGA for all says:

    The opportunity for convergence must be good. It should also allow some of the BDUK agreement to be re-examined. All the public subsidy for fibre spines can be re-used to support connectivity to rural masts freeing those funds for final 10% activity. The USC premiums could also be used to push fibre access futher, using 4G infrastructure to meet the USC.

  16. Avatar syed zair abbas zaidi says:

    Nice move by BT in order to captured market share .
    But people remember the experiences with BT and it hurt badly for EE when they join.
    I wish BT best of luck and please improve yourself .

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