Analysts react to BT’s £12.5 billion EE takeover bid

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BT set to buy UK’s largest operator and experts look at how this will impact UK telecoms market

BT has announced its intention to buy the UK’s largest mobile operator EE in a £12.5 billion deal and has entered exclusive talks that will take “several weeks”.

Under the terms of the proposed deal, EE owners Deutsche Telekom and Orange will take a 14 per cent and 4 per cent stake in BT respectively, with the former eligible to appoint one member to the BT board.

Mobile News asked telecoms analysts for their reaction to the news.

 CCS Insights multiplay and media director Paulo Pescatore

“We consider EE to be a more desirable asset for BT to own than O2 and thus view its move as a major statement of intent regarding its multi-play aspirations.

“EE has a more developed 4G network and has more mobile subscribers than any other UK operator. This offers a significant and highly attractive target market for BT to cross-sell fixed-line services to. Furthermore, the purchase builds on the existing close links between the two companies.

“More importantly however, it removes a converged rival from the market. Given that EE had multi-play aspirations of its own, BT will now face one fewer competitor.ccs_paolo_pescatore_col

“We see the deal as more complicated and time-consuming and thus consider it as a more risky option. In particuar, the deal will be subject to more stringent regulatory hurdles than buying O2. It combines the UK market-leader in fixed-line with the number one mobile operator. We believe it is unlikely that Ofcom would block the deal, but the combined entity could be forced to dispose of some spectrum.

“Furthermore EE is owned by two companies that haven’t always agreed unanimously on strategy for EE – this could make the deal more time-consuming to complete. EE is also still in the process of consolidating a complicated mix of networks, brands and back-office systems. The deal to buy O2 wouldn’t have involved this level of complexity.

“BT’s move reflects the company’s strong ambitions in multi-play and serves as a clear warning to UK rivals, notably Vodafone, Sky and Virgin Media. These companies will be forced to review their position as the market for convergence in the UK rapidly comes to the boil.”

Kantar Worldpanel senior analyst Imran Choudhary

“BT has invested close to £1 billion into its TV packages and holds the largest share of consumer broadband in the UK. Picture1 (2)

“Moving into the mobile market is now a must for BT to defend their premium services that are increasingly under threat as others branch out with triple and quad play offers.

“Acquiring EE would give BT instant access to roughly one in three mobile customers in the UK who already use the EE network. BT already has an agreement with EE to use part of its network, so buying the whole network would provide a strong platform for BT to lead the telecommunications sector in the UK. Consumers should see some real benefits as others follow its lead with quadplay offers.

“Moving into the mobile market is a must for BT to defend its premium services which are increasingly threatened as other players enhance their triple and quad play offerings.”

Ovum analysts Matt Howett and James Robinson

Firstly it’s important to stress that the competition issues raised by BT’s acquisition attempt of EE will be handled by European competition authorities, rather than by Ofcom, the national telecoms regulator. On the face of it, things look promising and the green light is likely to be given, albeit with some concessions. Recent remedies imposed in Germany and Ireland came about because the number of mobile operators was being reduced, however this transaction preserves a four player market in the UK. That said, BT was particularly successful in the 2013 4G spectrum auction acquiring spectrum at 2.6GHz and regulators are likely to focus on the combined entity’s overall spectrum portfolio.

Competition issues would be more relevant if Hutchinson Three turned their attention to acquiring O2. This would see a change in the number of operators, something Ofcom has fought tirelessly to preserve. If the BT/EE tie-up goes ahead, the other MNOs in the UK are likely to ask for a guarantee that wholesale products BT currently provides for mobile backhaul will continue to be offered on a non-discriminatory basis.

From a commercial perspective, the firms are largely complimentary as the UK market moves towards quad-play. The move would reduce a quad-play rival in the UK, but EE’s TV service has only been launched recently, so competition would not be damaged in practical terms. Spectrum could be a concession as the merged firm’s 2.6GHz holding would be large, but O2 and Three could be interested in this as they currently don’t have anything in that band.

O2 is likely to be the biggest loser should the move be successful. Telefonica has made it clear that it was interested in exiting the UK and it could now struggle commercially against its convergent rivals BT, Virgin and Vodafone. From the wireline perspective Sky and TalkTalk may also be marginalised if quad-play proves successful, although they have not made such public proclamations as O2 to exit the market.

MUFG telecoms and industrials analyst Rick Mattila

“On the basis of the equity components of the deal, it would appear that BT will assume the c.£2bn of net debt current in EE and that the group will need to fund a cash component of around £3.5bn on top of that. BT will of course gain the c.£1.6bn EBITDA that EE generates per annum at present. On that basis – and before making any assumption on synergies that are likely to be meaningful and assuming debt funding for the cash components – BT will find its net leverage rising from c.1.2x to around 1.7x (excluding pensions). This rise in leverage is of course mitigated by what will be a significant improvement in business profile. Rick Matilla_5786

“It would appear likely to us that BT will lose the positive outlooks that it currently has on its mid-BBB ratings with Moody’s and Fitch. Although further rating pressure cannot be ruled out, we believe that the group is in a position to maintain mid-BBB status particularly if management chooses to use hybrids or a small rights issue as part of the funding for the cash component.

“Agencies are likely to wait for funding details before making any final decisions. The other notable unknown at this stage is the regulatory reaction to the larger entity and in particular any weakening of the earnings of BT’s Openreach unit. We reiterate our neutral view on BRITEL bonds, but would look to take exposure on any material widening and potentially upon issuance of new bonds as part of the funding for the deal.

“Interestingly, the biggest impact from the deal announcement may be on names that are not directly involved. Telefonica’s o2 business in the UK will now face a stronger competitor and we would expect Telefonica to consider other options for the UK business. These include a potential combination with Hutchison’s Three, although this move would likely face material regulatory scrutiny.

“In any case, the lack of disposal proceeds in the near-term will likely be taken as a negative by credit markets overall. We have a positive view in TELEFO bonds, including hybrids, and we would look at the likely slight weakening in spreads today as a potential attractive entry point to these instruments.

“We also note that the Financial Times today again mentions the possibility of a combination between Vodafone and Liberty Global as a potential reaction to BT’s move into mobile. We continue to view such a move as logical and even probable. We continue to prefer to avoid VOD bonds at this point.”

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