BT urges caution over its £12.5bn acquisition of EE

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Telecoms provider outlines additional risks that proposed purchase of mobile operator could create, warning there is no assurance the deal will be approved 

BT has urged caution over its proposed £12.5 billion acquisition of EE, outlining a number of risks that could arise whether or not the deal is approved.

These were listed in the telecoms provider’s financial results for Q4 and the year ending March 31, 2015, which saw the company report a 14 per cent rise in annual profits to £2.6 billion.

Within this, it outlined 10 additional risks around the acquisition beyond those listed in its shareholder circular, which was published on April 1.

Approval of the acquisition

The first of these centres around approval of the acquisition from the Competition and Markets Authority in the UK. BT warned this may take longer than expected to obtain, may not be granted or may be granted subject to conditions or remedies.

It warned any of these could delay or jeopardise completion, impose substantial additional costs for the enlarged group and/or materially reduce the benefits of the acquisition, or result in an adverse effect on the enlarged group’s business, financial condition and result of operations.

This comes just a week after EE CEO Olaf Swantee exclusively told Mobile News he expected the deal to gain approval before the end of the year, and could see no obstacles that would stand in its way.

EE’s performance prior to completion of the acquisition

The second risk relates to the negative impact the run-up to the deal may have on both BT and EE’s performance, such as some customers or partners terminating or reducing their business relationships with the enlarged group, for example to avoid sourcing too great a proportion of services from one company.

It added potential customers may delay entering into, or decide not to enter into, a business relationship with the companies until completion of the acquisition because of perceived uncertainty over it; EE may fail to retail key personnel and other employees; and third parties may end or alter existing contracts with EE as a result of the acquisition.

Realising synergies following integration

BT said the success of the enlarged group will partly depend on the effectiveness of the integration process and ability to realise the anticipated benefits and synergies from combining the businesses. These synergies include expected operating cost savings and capital expenditure savings of £360 million per year, to be realised in the fourth full year following completion.

The firm warned the challenges in combining the firms may not be known until after completion and if they can’t be overcome, for example because of any difficulties in implementing fixed-mobile convergence or a lack of customer demand for the offerings, the anticipated benefits will not be fully achieved.

It warned it may experience difficulties in integrating EE with its existing businesses and may not realise, or might take longer than expected to realise, certain or all of the perceived benefits of the acquisition.

BT added there is also a risk that synergy benefits and growth opportunities from the deal may fail to materialise or may be lower than expected while the cost of generating these synergies, expected to be around £600 million, may exceed expectations.

Increased cost of debt

The enlarged group may also face increased costs when it seeks to refinance or repay its debt as a result of the increased level of debt following completion. The deal is being funded by a £3.6 billion debt bridge facility, which may be extended for an additional 12 months following its one year maturity.

BT said the costs on which the enlarged group is able to refinance this will partly depend on market conditions, with unfavourable economic conditions possibly impacting the cost and terms on which the enlarged group is able to access capital markets.

Handset and network deployment

The company then warned of delays in the development of handset and network compatibility and components hindering the deployment of new technologies.

It said EE uses technologies from a number of vendors and incurs significant capital expenditure deploying these, adding there can be no assurance that common standards and specifications will be achieved, that there will be interoperability across BT’s EE’s and other networks, that technologies will be developed according to schedule and that they will perform according to expectations or achieve commercial acceptance.

BT warned failure to achieve these could result in additional capital expenditure by, or reduction in profitability of, the enlarged group.

Technological change and market acceptance

The next risk centres around the enlarged group possibly not succeeding in making customers sufficiently aware of existing and future services or creating customer acceptance of these services at prices BT would want to charge. It also warned the enlarged group may not identify trends correctly, or be able to bring new services to market as quickly or as price-competitively as its competitors.

BT said these risks exist in mobile, such as mobile data services or other advanced technologies supported by advanced smartphone products. It also said areas such as mobile payment services based on contactless technology also poses a risk where differences in the regulatory treatment of different operators based on their choice of technology could put the enlarged group at a competitive disadvantage.

Furthermore, it said as a result of rapid technological progress and the trend towards convergence, new and established information and telecoms technologies or products may fail to complement each other and in some cases become a substitute for one another.

It used VoIP as an example, with the introduction of handsets with this functionality possibly affecting the enlarged group’s pricing and market share in its mobile voice telephony business. It added if it doesn’t anticipate the demand for new technologies and adapt its strategies, service offering and pricing accordingly, the enlarged group may be able to compete effectively.

Supplier failure

Using EE’s network sharing agreement with Hutchison Whampoa as an example, BT said the failure of this joint operation to fully support the enlarged group’s interests and goals, or any disruption to the operation of EE’s network share agreement, could cause significant harm to the enlarged group’s business.

It added that as demand for mobile products increases globally, there could be shortages in the number of devices produced as a result of insufficient manufacturing capacity, the lack of availability of internal components or major supply chain disruptions.

Spectrum pricing and regulation

BT said any significant increases in spectrum pricing from Ofcom applicable to the enlarged group may have an adverse effect on its business and result of operations.

It added that as technology and market dynamics develop and as EE’s mobile businesses is integrated into BT, then a wider range of existing regulations will apply to the enlarged group and a broader range of new and/or modified regulations may be directed at it.

Network and licence investment

The telecoms provider acknowledges the investment EE has made in the acquisition of licences and in its mobile networks, adding EE expects to continue to make significant investments due to increased usage and the need to offer new services and greater functionality.

However, it said that there is no assurance that new services will be introduced on schedule or that the level of demand for these will justify the cost of setting up and providing new services (in particular, the cost of new spectrum licences and network infrastructure).

BT warned that a failure or delay in completing networks and launching new services, or increases in the associated costs, could have an adverse affect on the enlarged group’s business and operations and could result in significant write downs of the value of network spectrum or other licences.

It added that if the economic climate worsens, the enlarged group may decide or be required to scale back capital expenditure, with a lasting reduction in this below certain thresholds possibly affecting its ability to invest in its mobile network, new technology and its other businesses.

Transmission of radio waves

BT also points towards reports that radio frequency emissions from mobile devices and sites may cause health issues and may interfere with some electronic medical devices, such as hearing aids and pacemakers. Despite assurances from The World Health Organisation that there are no adverse effects, it said the enlarged group can’t provide assurance that research on the future will not establish links between radio frequency emissions and health risks.

It said therefore these concerns may discourage the use of wireless devices, impairing the enlarged group’s ability to retain customers and attract new ones, possibly resulting in restrictions on the location and operation of mobile sites and the usage of the enlarged group’s wireless technology. It concluded that these concerns could lead to litigation against the enlarged group.

Case for acquisition to be approved

BT is expected to this week make its case to competition watchdogs that the £12.5 billion takeover of EE should be approved.

The deal, which was confirmed in February and approved by shareholders last week, will be formally submitted to the Competition and Markets Authority, according to reports in the Financial Times.

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