November 24, 2014 / 11:15 AM / 5 years ago

BT lines up O2 and EE in quest for British telecoms supremacy

LONDON/MADRID (Reuters) - Britain’s BT Group (BT.L) has been approached by O2 owner Telefonica (TEF.MC) and the parents of O2’s bigger rival EE to discuss competing multibillion-pound deals to create a powerhouse in fixed-line broadband, mobile and TV.

The BT communication tower is seen from The View gallery at the Shard, western Europe's tallest building, in London January 28, 2014.REUTERS/Suzanne Plunkett

The former monopoly’s long-mooted expansion into mobile expected next year appears to be acting as a catalyst to consolidation in Britain, where the market is split between four mobile networks and four major broadband providers.

Operators are starting to jockey for position as consumers increasingly favour buying fixed and mobile services as a package from a single provider, making existence as a mobile-only operator more difficult.

One sector banker said BT had already signalled its intention to be a leader in market consolidation.

“BT has played its hand brilliantly so far,” he said. “They’ve held out the threat of entering in the mobile market and engineered a situation to bring EE and Telefonica to the negotiating table. Now BT will play them off each other since neither wants to be left without a partner in broadband.”

Executives from Spain’s Telefonica and EE’s owners, France’s Orange (ORAN.PA) and Deutsche Telekom (DTEGn.DE), said last week that their strategies in Britain would depend in part on how aggressively BT went into mobile and whether consumers showed more interest in bundled deals.

But behind the scenes they had already sounded out BT about buying their mobile operations and other possible tie-ups.

“This could be the moment that commitment to the UK mobile market finally cracks and we see parent companies starting to exit,” Citigroup analysts said in a note, adding that profit margins in Britain are very low compared with other markets.

Both Telefonica and BT confirmed they are in early stage talks after Spanish website El Confidencial reported that O2 could be sold in return for a 20 percent stake in BT as part of a “strategic alliance” to strengthen the two groups.

BT also said it was in talks with another British mobile operator, which two sources close to the matter said was EE.

“All discussions are at a highly preliminary stage and there can be no certainty that any transaction will occur,” BT said.

Telefonica has said that O2 remains core to its business but it has not ruled out asset sales to meet a target to reduce debt to less than 43 billion euros (34 billion pounds) by year-end.

A deal would bring O2 back into the BT fold, having been spun off from the former British telecoms monopoly in 2001 and then bought by Telefonica eight years ago.

LOST VALUE

Telefonica paid 18 billion pounds ($28.2 billion) to buy O2, but analysts put its value today at less than 10 billion pounds.

With Deutsche Bank pegging BT’s market value at 31 billion pounds and a typical telecoms industry multiple of 7.5 times income giving O2 a value of close to 9 billion pounds, an all-share deal would give Telefonica about 22 percent of BT.

BT, which commands 32.1 percent of Britain’s retail broadband market, is already working on a plan to return to consumer mobile using a combination of its own airwaves, in-home receivers that route calls over its fixed-line network, wifi hotspots and fill-in capacity rented from EE.

EE, meanwhile, is as dominant in mobile as BT is in broadband. It held 33.8 percent of the market in terms of service revenue at the end of the second quarter, according to Citigroup, against Vodafone’s (VOD.L) 26.5 percent, O2’s 26.2 percent and Hutchison’s 0013.HK 10.2 percent.

In broadband, BT is trailed by satellite operator BSkyB, which has a 22.8 percent, Liberty Global’s (LBTYA.O) Virgin Media with 19.8 percent and TalkTalk (TALK.L) at 18.3 percent.

A Telefonica executive did not rule out a sale of O2 at an industry conference last week, saying the company would have to “evaluate its options” if more of the market moved to bundled services.

Deutsche Telekom and Orange, which put plans for an initial public offering of EE on ice this year, had no immediate comment. However, Orange CEO Stephane Richard last week said EE would have to reconsider its positioning as a primarily mobile provider, though he downplayed the urgency.

Shares in BT rose to a nine-week high after the talks were revealed on Monday and were up 3.7 percent at 394 pence by 1424 GMT. Telefonica shares rose 1.3 percent to 12.63 euros.

Orange gained 0.8 percent to 13.82 euros, with Deutsche Telekom up 1 percent at 13.29 euros.

Additional reporting by Sarah Morris, Robert Hetz, Sarah Young, Harro ten Wolde, Gwenaelle Barzic and Danilo Masoni; Editing by Leila Aboud and David Goodman

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