Shares in BT (BT.A) surged to a near-decade high as investors rallied around the telecoms giant's proposed £12.5bn takeover of mobile operator EE. BT is in exclusive talks with Orange (Fr: ORA) and Deutsche Telekom (Ge: DTE) to secure the biggest acquisition in its history; a successful deal would make it the largest fixed-line and mobile services provider in the UK.
BT initially planned to launch its own mobile offering early next year, then decided to take a shortcut by acquiring either EE or mobile carrier O2. Rebuffed O2-owner Telefónica (Sp: TEF) may now seek to partner with TalkTalk or Three, a smaller mobile operator owned by Hutchison Whampoa. BT likely chose EE because of its larger customer base of 25m and its extensive high-speed '4G' network, which should accelerate its 'quad-play' efforts to offer TV, broadband and both fixed-line and mobile telephony. It would also gain hundreds of high street EE stores through which it can sell bundled services.
BT's offer price values EE at about eight times the carrier's cash profits of £1.59bn last year. It expects to sweeten the deal through post-deal savings such as lower marketing and sales costs and back-office consolidation. Moreover, Jefferies thinks cross-selling fixed-line and mobile services could increase annual group sales by two per cent within five years, and reduce operating costs by three per cent. It expects pre-tax profit of £4.06bn in the year to end-March 2016, giving EPS of 31.4p, up from £3.14bn and 31.3p.
The proposed deal would give Deutsche Telekom a 12 per cent stake in the combined business, while Orange would own 4 per cent. BT would supplement that with £6.3bn in cash, which broker Jefferies thinks it will partly fund through a £2bn rights issue. That would leave BT's net debt at about 2.16 times next year's forecast cash profits, more than double its expected leverage this year. Another concern for investors will be how industry watchdog Ofcom reacts to an enlarged BT.
