BT Gets Final Go-Ahead for $17.9B EE Takeover

UK authorities have given the final seal of approval to BT's £12.5 billion (US$17.9 billion) takeover of EE, a deal that will create a fixed-and-mobile powerhouse in the UK telecom market by the end of this month. (See BT Locks Down £12.5B EE Takeover Deal.)

The deal brings together the country's biggest fixed and mobile operators and has been fiercely criticized by their rivals, which fear it will give rise to a new monopoly years after the market was first deregulated.

The combined entity will serve more than 25 million mobile connections and have about 8.8 million broadband customers. According to TalkTalk , the UK's fourth-largest broadband company, it will control as much as 45% of UK wireless spectrum and about 40% of the consumer telecom market.

"We are disappointed, although not surprised, that the CMA has waived through the BT/EE merger, even though the new entity will be even more dominant than it was before privatization 30 years ago," said TalkTalk in a company statement.

Yet the UK's Competition and Markets Authority (CMA) has dismissed the various concerns about the merger, arguing that it will not result in a substantial reduction of competition in any of the sectors in which BT Group plc (NYSE: BT; London: BTA) and EE provide services.

The CMA's broad rationale is that because BT and EE operate largely in separate service sectors, a merger of their operations will not produce a dominant player.

This means BT will not have to make any of the immediate concessions that rivals had been demanding, which had included the divestment of some of its spectrum licenses following a merger.

For all the latest news from the wireless networking and services sector, check out our dedicated mobile content channel here on Light Reading.

Competitors including TalkTalk and mobile operator Vodafone Group plc (NYSE: VOD) have even been calling for the break-up of the former state-owned monopoly, believing that a spin-off of BT's Openreach access network business would address many competition-related concerns.

"We have heard wider concerns about the sector, including about Openreach and its regulation by Ofcom [the UK's telecom regulator]," said John Wotton, who chaired the CMA's inquiry. "There is also an ongoing Ofcom review into the sector and its future regulation, where such concerns may have more relevance." (See Ofcom Does Not Rule Out BT Carve-Up.)

Both TalkTalk and Vodafone have troubled wholesale arrangements with BT and Vodafone is particularly unhappy about having to purchase backhaul services from a business that will soon be its main mobile competitor.

Smaller fixed-line infrastructure rivals such as CityFibre have been vigorously courting retail operators in the last few months, hopeful that a merger between BT and EE will drive some business their way. (See UK Needs Fiber Infrastructure Rivalry – CityFibre.)

But the CMA insists that concerns about BT's wholesale position are groundless.

"We have also found that in supplying services such as backhaul, wholesale mobile or wholesale broadband services a combined BT/EE would not have both the ability and the incentive to disadvantage competitors such that there would be significant harm to competition," said Wotton.

Similarly, in the retail market, the tie-up will not lead to a meaningful reduction in competition in either the fixed or mobile markets, according to the CMA's analysis.

"As BT is a smaller operator in mobile, it is unlikely that the merger will have a significant effect," explained Wotton. "EE is only a minor player in retail broadband, so again it is unlikely that the merger will have a significant effect in this market."

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BT has naturally welcomed the move and said it expects to close the transaction on January 29.

The deal will leave EE parents Deutsche Telekom AG (NYSE: DT) and Orange (NYSE: FTE) holding respective shares of 12% and 4% in BT, making the German incumbent BT's largest single shareholder. (See BT, DT Tie-Up Holds All-IP, Cloud Promise.)

BT has already named Marc Allera, EE's current chief commercial officer, to the position of EE CEO, and said it plans to keep using the EE brand. (See Allera Will Replace Swantee as EE CEO.)

BT will no doubt have spotted an opportunity to slash costs through staff cuts and the consolidation of equipment and facilities, but its primary motive in acquiring EE is to ensure it does not get left behind in the transition to a converged-services future.

Figure 1: Thank You, CMA! BT CEO Gavin Patterson recognizes the importance of owning fixed and mobile access networks in the fast-changing communications sector.

Ultimately, the operator wants customers to be able to use a variety of services on any type of device, whether on the move or at home/work.

In the short term, it is likely to ramp up its promotion of quad-play offerings that bundle fixed voice, broadband, mobile and TV services in one package and bill.

While EE reaches out to BT fixed-line customers who lack a mobile service or use another provider, BT will focus on "upselling" its broadband and TV products to EE subscribers.

The dynamic is likely to put huge pressure on rivals like Vodafone, which has made moves into the broadband sector but still lacks a major access network presence of its own.

Analysts have suggested that Vodafone could look to merge with cable operator Virgin Media Inc. (Nasdaq: VMED), the UK's third-biggest broadband operator, in response to BT's acquisition of EE.

Vodafone last year held talks with Liberty Global Inc. (Nasdaq: LBTY), Virgin Media's owner, about an exchange of assets in Europe; those eventually proved fruitless but the mobile operator has indicated the door remains open to future discussions with Liberty Global. (See Vodafone Rules Out Emerging-Markets Spin-Off and Vodafone in Asset-Swap Talks With Liberty.)

Attention in the UK will now shift to the proposed £10.25 billion ($14.7 billion) merger between Telefónica UK Ltd. , which trades under the O2 brand, and Three UK -- the country's second- and fourth-biggest mobile operators respectively. (See Telefónica Seals $15.2B O2 Sale to Hutchison.)

That deal is currently being examined by European Union (EU) authorities and would appear to stand less chance of being approved than BT's takeover of EE.

The move would leave the UK with just three mobile operators and EU authorities have recently rejected similar proposals in other European markets.

Nevertheless, analysts have previously argued the UK will need a new mobile giant as a counterweight to BT/EE.

"When they approved BT/EE they created a very big operator and therefore it would make sense to allow 3 and O2 to level the playing field," said Bengt Nördstrom, the CEO of consulting and market research player Northstream , when commenting on the CMA's provisional clearance of the BT/EE deal in October. (See UK Needs O2/3 to Challenge BT/EE – Analyst and Eurobites: BT-EE Deal Clears Another Hurdle.)

— Iain Morris, , News Editor, Light Reading