By Shayndi Raice And Ruth Bender
LONDON-- BT Group PLC said Monday it has entered exclusive talks
to buy U.K. mobile operator EE for GBP12.5 billion ($19.6 billion)
in cash and stock, a move that would get the British fixed-line
giant back into mobile services and further scramble a fast-moving
telecoms sector across Europe.
BT said talks were likely to continue for several weeks with EE
owners Deutsche Telekom AG of Germany and France's Orange SA. If a
deal is reached, BT would partially pay for the deal by offering
new shares in itself to EE's owners. Deutsche Telekom would end up
with a 12% stake, and a board seat, at BT. Orange's stake in BT
would come out to 4%.
The deal highlights a growing recognition by European
telecommunications firms that they must offer bundled services to
grow. Flagging revenue from fixed-line and mobile is leading
companies to bet that so-called triple and quadruple play
deals--which bundle a combination of fixed-line, mobile, broadband
and media offerings--could help jump-start revenue.
While some other European countries, such as Spain and Germany,
have embraced the move to bundle services, the U.K. remains slow to
join the convergence trend. The deal could spark a flurry of
follow-on activity, as the remaining mobile players seek to
position themselves to compete with a more powerful rival in
BT.
The talks are the latest in a series of large telecom deal
making that is rippling through Europe. Operators want economies of
scale to help boost profits, while they face stalling revenue in
markets that for the most part are considered mature and have been
consumed by price wars.
Earlier this year, Luxembourg-based telecom company Altice SA
bought mobile company SFR and merged it with cable group
Numericable in France. Altice is also in the process of buying
Portugal's former telecom monopoly PT Portugal, its latest bet on
the convergence of cable with mobile.
BT had previously been looking at both EE and O2, the British
mobile operator owned by Spain's Telefonica SA. By deciding to go
for EE, BT opted for a deal that could be more complex to execute.
But it also gives it access to a larger mobile footprint.
The U.K. market is dominated by four big players, EE, O2,
Vodafone PLC and Hutchison Whampoa Ltd.'s Three. Vodafone,
Hutchison Whampoa and Sky PLC are exploring what moves they may
take in the shifting market, according to people familiar with the
matter.
Philip Lawlor, chief investment strategist at Smith &
Williamson, said the talks were "yet another sign that M&A
activity in Europe is on the steep upward incline."
A deal would bring BT over 30 million customers, 580 retail
stores and about 15,000 new employees. It would also give it a
sprawling 4G network that currently covers some 75% of the U.K.
population. Vodafone and other competitors have been racing to roll
out and upgrade 4G, a faster network that can better cater to the
increasing amount of content, such as video, that customers are
asking for.
But a deal to buy EE would also leave BT with two minority
shareholders. EE's German and French telecoms operators, which each
hold an equal 50% share in EE, have been looking for a way out of
their joint venture for some time. Early this year, the two
companies abandoned the idea of a possible listing of EE, and
Orange Chief Executive Stephane Richard said in November that the
50-50 structure wasn't a viable solution for the long term.
Discussions about the future of EE between the two partners
picked up in recent months, according to people familiar with the
matter.
By agreeing to a lower stake, Orange will take away more cash
from the transaction. According to a person familiar with the
matter, Orange could walk away with around GBP3.7 billion under
terms of the current proposal.
BT didn't detail the cash portion of the proposal, but said in a
statement it is "mindful of the importance of maintaining a
conservative financial profile."
Shares in BT were closed at the time of the announcement, having
risen a little under 0.2% Monday. Year-to-date they are up by 4.9%,
outperforming London's FTSE 100 index, which has fallen 8.4% so far
this year and fell 1.9% on Monday. Shares in Deutsche Telekom and
Orange ended the session down 1.8% and 2.2%, respectively.
The announcement by BT comes after weeks of discussions with
both EE and O2. O2 was seen by many as a front-runner because it
was smaller, and theoretically an easier deal to negotiate because
of its single owner.
BT's decision to pick EE, not O2, for exclusive talks leaves
Telefónica in the lurch. A deal for O2 would have allowed
Telefónica to free up cash for investments in markets where it is
seen to have a stronger competitive position, such as Latin
America. O2, which analysts value at roughly $14 billion, has over
24 million customers. A Telefónica spokesman declined to comment on
BT's decision to begin exclusive talks with EE.
For Orange, the deal would free up more cash as the company
looks to consolidate its position elsewhere. The former French
monopoly in September offered EUR3.33 billion ($4.14 billion) to
buy Spanish telecom company Jazztel. The company has also said it
is eager to consolidate its position in other markets such as
Romania, Belgium and Slovakia.
Josie Cox
and Christopher Bjork contributed to this article.
Write to Shayndi Raice at shayndi.raice@wsj.com and Ruth Bender
at Ruth.Bender@wsj.com
Access Investor Kit for Deutsche Telekom AG
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=DE0005557508
Access Investor Kit for Telefonica SA
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=ES0178430E18
Access Investor Kit for Orange SA
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=FR0000133308
Access Investor Kit for BT Group Plc
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=GB0030913577
Access Investor Kit for Vodafone Group Plc
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=GB00BH4HKS39
Access Investor Kit for BT Group Plc
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US05577E1010
Access Investor Kit for Deutsche Telekom AG
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US2515661054
Access Investor Kit for Orange SA
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US6840601065
Access Investor Kit for Telefonica SA
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US8793822086
Access Investor Kit for Vodafone Group Plc
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US92857W3088
Subscribe to WSJ: http://online.wsj.com?mod=djnwires