In a move that would boost BT’s standing as the leading integrated telco and increase pressure for competitors, Orange and Deutsche Telekom have entered into exclusive negotiations with BT Group regarding a potential divestment of 100% of their shares in EE, their joint venture in the UK. The purchase price of £12.5 billion on a debt-/cash-free basis would be split equally between Orange and Deutsche Telekom. At a price of roughly 7.8 times EV/EBITDA the deal isn’t outrageously overpriced. So what could this mean for the various market participants? Should the deal go ahead, we believe that the implications for the UK telco market would be significant as:
- BT becomes once again the leading integrated telco in the land. A deal would have a larger impact on BT’s consumer than its business activities given EE’s customer base of 24.5 million mostly consumer mobile customers. As the strongest 4G LTE provider in the UK, EE would give BT a platform to deliver interesting new bundles such as dedicated sport channels for smartphones and tablets. EE would be an important asset to enhance BT’s already successful retail arm, in particular its IPTV activities, where BT is one of the few telcos that manages to offset the decline in traditional telco services with a new offering. The deal would fail to bring any significant new customer relationships in the business arena. Going forward, however, this would finally provide BT with the opportunity to develop mobile moments for its business customers.
- DT and Orange would get out of a market where both telcos failed to succeed in the past. Both DT and Orange tried unsuccessfully for years to find a solid footing for their own respective telcos (T-Mobile UK and Orange UK) and later on for their combined UK operation EE. The deal would provide DT and Orange with a mix of cash and new BT shares. Deutsche Telekom would get a 12% stake in BT as well as a seat on BT’s board, and Orange would get a 4% stake in BT plus a higher proportion of cash to preserve an equal split of the net proceeds from the sale of EE. This arrangement would allow DT and Orange to still earn some attractive dividend payments from the UK telco market via BT.
- Telefonica would face much more intensive competition as a mobile-only telco in the UK. Yet, as long as no definite deal has been announced, Telefonica remains in the race to sell its O2 UK operation to BT. A deal between BT and O2 UK could potentially be easier to negotiate as BT would have to talk only to one telco, not two. Moreover, for O2 UK it would be a sort of homecoming, as it was O2 UK (then BT Wireless) that was spun off from BT in 2001 to avoid BT bankruptcy. The cultural fit between O2 UK and BT might well be closer than between BT and EE — although I am not sure this is necessarily a good thing in this case as telcos all require a new culture anyway.
- Vodafone would be pushed to strengthen its integrated telco ambitions. Despite Vodafone’s 4G roll-out activities, a BT-EE deal would make life much tougher for Vodafone as it would face a strong, integrated BT. As the third-largest wireless carrier in Britain, Vodafone would have to look much more closely at the potential combination with Liberty Global, which operates the Virgin Media TV and broadband brand, even at the expense of losing control over its UK operations.
Irrespective of the outcome of the deal, and in line with our recent “Predictions 2015: Telecoms Will Struggle To Align To The CIO's BT Agenda” report, we’re certain about one thing: Telco consolidation is very real.