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BT Locks Down £12.5B EE Takeover Deal

Iain Morris
2/5/2015

BT has agreed a £12.5 billion ($19.1 billion) takeover of EE, creating the UK's biggest operator of both fixed and mobile networks.

The deal, which has been in the works since December, will support a move into converged services by the UK fixed-line incumbent and promises to radically shake up the country's telecoms market. (See BT Offers $19.5B to Buy EE and Why BT + EE Makes More Sense.)

Unlike other former state-owned European operators, BT Group plc (NYSE: BT; London: BTA) decided to spin off its BT Cellnet mobile division in 2001. That business was subsequently acquired by Spain's Telefónica SA (NYSE: TEF) and rebranded as O2.

But the incumbent has been eager to return to the mobile sector for some time, picking up 4G spectrum during a government-run auction in early 2013, and a takeover of EE would give it around 24.5 million mobile customers and control of the UK's biggest 4G network at a stroke.

The operator is forecasting a surge in demand for converged services that bundle the capabilities of fixed and mobile networks. Speaking with analysts on a conference call, CEO Gavin Patterson said the move would equip BT to compete against rivals such as Virgin Media Inc. (Nasdaq: VMED) and TalkTalk , which have already launched converged-services products. (See Quad-Play Cheerleader TalkTalk Falls Further Behind BT.)

BT is to fund the EE takeover through a mixture of cash and stock and plans to raise £1 billion ($1.5 billion) from selling new shares to support the transaction. The cash component will also include between £4.7 billion ($7.2 billion) and £5.2 billion ($7.9 billion) in debt, said the operator.

Germany's Deutsche Telekom AG (NYSE: DT), which owns 50% of EE, will gain a 12% stake in BT, making it the company's biggest shareholder, while Salt SA -- EE's other parent -- will take a 4% stake.

Deutsche Telekom CEO Timotheus Höttges will also have a seat on BT's board after the deal closes.

The fee of £12.5 billion ($19.1 billion) values EE at about six times its EBITDA and 9.6 times its operating free cash flow last year.

BT believes it can generate operating and capital expenditure savings of about £350 million ($534 million) per year from the deal, saying it will reach this figure during the fourth year after the transaction closes. Those projected savings are equivalent to a net present value of about £3.5 billion ($5.3 billion), or £3 billion ($4.6 billion) after integration costs are taken into account.

It is also guiding for revenue synergies with a total net present value of about £1.6 billion ($1.4 billion).


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


Explaining BT's rationale on a conference call with analysts, Patterson said there was very little sales overlap between BT and EE, giving each business a huge cross-selling opportunity.

"Only about a third of BT households take services from EE and there may also be an opportunity to consolidate members of a household to one mobile provider," added Tony Chanmugan, BT's CFO.

Earlier today, EE reported a decline in service revenue for its October-to-December quarter, but Patterson suggested the fusion of fixed and mobile networks and services could fuel sales growth in future.

"When mobile subscriptions are combined with fixed, there are significant attachment rates being achieved in parts of Europe and that will be key to driving revenue growth," he said.

BT is also keen to take possession of the 580 retail stores that EE maintains up and down the UK, saying these will help it to increase the penetration of its own products and services.

The merger will have to be cleared by competition authorities but BT is confident of completing the transaction by March 2016.

Patterson, however, has already been forced to play down concern that BT's Openreach network access business will be subject to further regulation as a result of the tie-up.

"This is a complementary business to our own business so it doesn't increase the concentration in the mobile market or in fixed," he told analysts. "Openreach is already tightly regulated and it will continue to serve all service providers in same way after this transaction so there will be no inherent advantage we'll be able to extract."

Next page: Unhappy rivals

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petercf
petercf
2/18/2015 | 5:05:22 AM
BT's real target
If the deal goes through and EE maintains its lead position as the potential lead LTE operator to supply services to UK Govt't to replace the Airwave Tetra network then,

BT gains not only a mobile operation but also the "supply of all LTE Public Safety services to the UK Government and its agencies"- that puts BT as the monopoly player for both normal ethernet/LAN/WAN/fibre/voice services into government and MoD but also all of the public safety mobile services.


That is something for the competition commission to think about.
Ariella
Ariella
2/5/2015 | 10:37:25 AM
Re: New Names
@Gabriel That's the impression I got from this statement, "More seriously, BT is a good company, with good technology, and reliable services in the round."
Gabriel Brown
Gabriel Brown
2/5/2015 | 10:34:41 AM
Re: New Names
In what sense do you mean?

I'm optimistic Olaf Swantee will make out with a big bag of cash

There is a serious point in that most British people will have at least some of their pension invested in BT and Vodafone. From that point of view, I'm probably neutral.
Ariella
Ariella
2/5/2015 | 10:28:25 AM
Re: New Names
@Gabriel so overall, you're optimistic, I take it.
Gabriel Brown
Gabriel Brown
2/5/2015 | 10:12:38 AM
Re: New Names
Speaking of which, I summarized UK 4G subscribers this morning on Twitter:

Gabriel Brown @Gabeuk

Update: Latest figures on UK 4G customers at end 2014: EE 7.7M, Three 3.5M, O2 >3M, Vodafone 2.2M Total: Approx: 16.5M
Gabriel Brown
Gabriel Brown
2/5/2015 | 10:09:22 AM
Re: New Names
I've come to like quite a bit of 80s music that at the time (as a child and scruffy teenager) I wasn't into. Duran Duran aren't quite there yet.

So, Ariella, no, it's not a bad thing, but good and bad together.

More seriously, BT is a good company, with good technology, and reliable services in the round. EE has done very well with 4G in a European context.

I can see why DT would want to own 12% of the largest operator in a wealthy, consolidating market, even if the short term cross-selling targets referenced in the article look ambitious.
Ariella
Ariella
2/5/2015 | 9:56:30 AM
Re: New Names
@Gabriel I take it you mean it will be a bad thing.
mendyk
mendyk
2/5/2015 | 9:56:23 AM
Re: New Names
Do you mean in a Duran Duran kind of way?
Gabriel Brown
Gabriel Brown
2/5/2015 | 7:19:38 AM
New Names
 

BT Everywhere

Everything BT

It'll be like the 1980s all over again in Britain.
iainmorris
iainmorris
2/5/2015 | 7:11:41 AM
Vodafone response
Vodafone has reportedly announced plans to launch fixed and TV services by leveraging its C&W assets but one wonders if that will be enough to make it a strong competitor to BT/EE and various other converged services players. No wonder Colao sounds so concerned about the BT deal!
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