Telefónica Buys Be
The acquisition, of broadband newcomer Be Un Limited , will help O2 keep pace with the combined fixed/mobile service plans of its main British mobile competitors.
Be is a relatively small broadband service provider that has been aggressively unbundling the local loop and installing its own DSLAMs in BT Group plc (NYSE: BT; London: BTA)'s local exchanges.
To date, Be has unbundled 150 exchanges and is due to install DSLAMs in a further 400 by the end of 2006, which would give it about 50 percent U.K. population coverage. Be's long-distance network is provided by wholesaler Fibernet Group plc (London: FIB). (See Be Picks Fibernet.)
The acquisition means O2 doesn't have to start from scratch in the unbundling process, something it has been looking at for some time. (See Mobile Giants Size Up DSL and O2 Confirms DSL Aspirations.)
It also means O2 can keep pace with rivals such as Orange UK and Vodafone Group plc (NYSE: VOD), which have already announced plans to combine mobile and fixed broadband services. (See FT Turns Orange, Orange Juices Free Broadband Battle, and Vodafone Unveils Convergence Plans.)
But while it may be a little behind its competitors in strategy terms, it will certainly not be behind in technology. Be, which only began its unbundling process in 2005, has installed state-of-the-art ADSL2+ technology that can deliver up to 24 Mbit/s, though the actual throughput is often much lower. (See Be Rolls Out 24-Mbit/s Broadband and UK DSL Networks Getting Crammed.)
Alcatel (NYSE: ALA; Paris: CGEP:PA) is the vendor behind the service. Be has deployed Alcatel's 7302 Intelligent Services Access Manager as its multiservice IP DSLAM and also installed the vendor's 7450 Ethernet Service Switch, 7750 Service Router, and 5620 Service Aware Manager.
O2 chief spokesman David Nicholas says the acquisition is all about the technology. "We already have more than 16 million mobile customers we can sell broadband services to, so we just needed the infrastructure. Be comes with 9,000 existing customers, so that's nice, but the key to this acquisition is the technology."
He adds that O2 will sell Be-branded broadband for now, but won't say when the service might take the O2 name. He also wouldn't comment on the level of capital expenditure required to continue the unbundling process, or O2's service plans.
"There are commitments and plans in place and we'll be sticking to that. All I can say is that the investment required is not material in relation to our existing annual capex, and it doesn't impact any financial forecasts," says Nicholas. O2's planned capex across its European operations (U.K., Germany, Ireland, and the Czech Republic) for February to December 2006 (inclusive) is €2 billion to €2.3 billion ($2.5 billion to $2.9 billion).
O2 says it will retain all of Be's staff -- 20 in the U.K. and about 50 in India, where the company has its technical development and call-center staff.
Ovum Ltd. analysts Carrie Pawsey and Mark Main expect O2 to develop a fixed/mobile convergence service similar to BT's Fusion. (See BT Revamps Fusion Pricing.)
But, in a research note issued this morning, they stated that "before a converged product is offered, we would expect O2 to bundle together mobile and broadband services, offering single billing and a discounted price for taking both services."
O2's acquisition of Be is in line with Telefónica's newly stated M&A policy following its 2005 spending spree. It told investors on May 26 that it would limit its acquisition outlay to €1.5 billion ($1.88 billion) until the end of 2007 and not use any shares to buy other companies. (See Would DT Buy BT? , Telefónica Swoops In on O2, and Eurobites: Incumbents Splash Their Cash.)
Analysts at Lehman Brothers stated in a research note this morning that "the scale of this acquisition is well within the limits set out by Telefónica at its recent investor conference and should allay some concerns that Telefónica may have been looking at more expensive acquisitions in this area."
For Be's investors it provides a very swift payback. In addition to the service provider's two founders, Boris Ivanovic and Dana Pressman, funding came in October 2005 from London-based Novator Partners LLP , which has also invested in mobile and broadband service providers in Eastern Europe. (See Be Raises £24.5M.)
Novator partner Bruce McInroy, a Be director, says some, but not all, of the £24.5 million ($45 million) raised -- £19.5 million ($36 million) from Novator, the rest from the founders -- has been spent by the broadband player. He would neither comment on Be's total funding nor say how much of Be's equity Novator holds, though he describes it as "a substantial minority."
Ivanovic helped found Be with the money he made from selling his previous broadband venture, Sweden's Bostream, which he sold in 2004. Neither of Be's founders were available for comment today. (See Sweden's B2 Acquires Bostream.)
— Ray Le Maistre, International News Editor, Light Reading