December 19, 2014    3 minute read

BT’s Response to Quad-Play

   December 19, 2014    3 minute read

BT’s Response to Quad-Play

BT Group plc is entering exclusive talks to acquire EE, the British mobile network provider jointly owned by Deutsche Telekom AG (DTE:GR) and Orange SA (ORA:FP). The deal, set to be worth £12.5 billion in cash and new BT ordinary shares, will grant Britain’s largest telecoms and broadband network operator a significant presence in the mobile network sector, and further consolidate its dominance as an industry powerhouse.

The two parties are currently in a period of exclusivity to complete due diligence and finalise negotiations. If an agreement is reached, the transaction will see Deutsche Telekom gaining a 12% stake in BT, while Orange will hold a 4% stake in BT. The former will also gain the right to appoint one member onto the board of directors.

The acquisition comes as a strategic move in enhancing BT’s existing strategy of comprehensive coverage. In an official statement, BT reiterated its aim of providing “innovative, seamless services that combine the power of fibre broadband, Wi-Fi and 4G.” The bundling of services is intended to boost customer loyalty and retain market share. It also puts BT into more direct competition with companies including Virgin Media who offer “quad-play” packages (broadband internet, cable television, mobile services, and fixed-line phone services). EE has 24.5 million customers, and currently owns the nation’s most advanced 4G network, thus represents an attractive investment in terms of growth and innovation opportunities.

Synergies in terms of back-office consolidation are also expected to lead to cost savings. These mainly include network and IT rationalisation, as well as expenditure relating to procurement, marketing, and sales.

A downside of the deal is its potential impact on the maintenance of a conservative financial profile. Half of the acquisition price will be financed with cash, likely through a rights issue or share placement, which will add to a current net debt of around £7.1 billion. S&P rates the company’s debt at triple-B, one of the lower categories within investment grade. The deal will also inhibit BT’s ability to bid for sports television rights. In 2012 it paid £2 billion to secure Premier League football, amongst other key TV rights.

BT’s acquisition of EE would certainly not be considered a surprise in he context of the recent upsurge of mergers and acquisitions across global telecoms and media sectors. Analysts attribute UK’s trend to growing revenues for broadband and falling revenues for mobile operators, which have been compounded by regulatory price cuts. With companies frantically trying to stay competitive, the sector should expect more mobile-broadband mega-mergers to take place in the coming quarters.

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