In a bid to accelerate its re-entry into the UK mobile market, BT (BT.A) may be looking to buy O2 or EE. The formerly nationalised telecoms giant is in talks with O2 owner Telefónica (Sp: TEF), as well as EE owners Deutsche Telekom (Ge: DTE) and Orange (Fr: ORA). A deal would mark another industry-shaking manoeuvre for BT, which has already broken into the TV market with BT Sport and challenged Sky for top-flight football broadcasting rights.
The discussions follow a spree of global telecom tie-ups, driven by operators' desire to scale up, reduce competition, share large infrastructure costs and offer lucrative 'quad-play' bundles of TV, broadband, fixed-line and mobile services. If BT is successful, further industry consolidation could arise as competitors react to the enhanced competitive threat.
BT exited the domestic mobile market nearly a decade ago, when it spun off Cellnet, an earlier incarnation of O2. It has already announced plans to offer mobile services over a virtual network and buy capacity from EE. But an acquisition would avoid the risks and costs of starting from scratch, and net it an established customer base: O2 has around 22m mobile subscribers, while EE has 25m.
The incumbents may be crossing their fingers for a deal. If BT snaps up a competitor rather than launching a new service, mobile operators' already tight margins are likely to benefit. O2 or EE also stand to gain as neither has a significant broadband presence. An alliance would broaden their exposure and allow them to cross-sell to BT's 7m retail broadband customers. Analysts think O2 could fetch £9bn, while EE's price tag may be closer to £11bn due to its higher penetration of super-fast '4G' technology and larger subscriber base.
One mooted deal would see the sale of O2 in exchange for a 20 per cent stake in the enlarged BT. That may be the better option, as EE is currently tangled in a complex integration of networks, brands and back-office systems. Buying O2 could boost BT's operating free cash flow by £700m and create at least £300m in capital spending synergies.
Broker Jefferies forecasts BT will report cash profits of £6.24bn for the year to March, giving EPS of 31.3p, up from £6.12bn and 28.2p.
