By Simon Zekaria
LONDON-- BT Group PLC, looking to storm back into mobile after a
more than a decade away, has a strong negotiating position, but
faces potentially onerous funding arrangements as European rivals
vie to sell the U.K. company their wireless businesses, analysts
said.
BT on Monday confirmed early-stage acquisition talks with
Telefónica SA's O2 unit. The 168-year-old British company is also
discussing a potential buy of EE, the U.K. mobile venture equally
owned by Orange SA and Deutsche Telekom AG, according to two people
familiar with the matter. Before the talks, BT had already planned
to offer cellphone service early next year by using capacity from
EE as a so-called mobile virtual network operator.
Formerly the state-owned British Telecommunications, BT
dominates the U.K.'s fixed-line telecom infrastructure but exited
consumer mobile operations under a debt pile. In recent years, it
has pushed broadband Internet connections and television services,
boosted by spending on sports-broadcasting rights.
BT, buoyed by GBP2.45 billion ($3.85 billion) in annual free
cash flow, is in a strong position to play the owners of O2 and EE
off each other to snap up one of the operations at a reasonable
price, for a combination of equity, cash and debt, analysts
said.
"With two operators potentially looking at selling their mobile
asset and the ability to launch independently through their
[leasing] agreement with EE, we believe BT is in the driver's seat
and the risk of overpaying for a mobile asset is reduced," RBC
analyst Michael Bishop said.
Still, the low margins, anemic revenue and hefty
capital-spending requirements of U.K. mobile operators would
complicate the financing of any transaction, making price even more
important.
"The likelihood is that BT would seek to offer a minority stake
in the combined entity to the owners of whichever network it
chooses to pursue, " said Mitsubishi UFJ Securities analyst Rick
Mattila, who values O2 at $14 billion and EE at $16 billion. "We
believe BT to be open to either [operator]."
There are some questions about the timing of BT's offer. One
banker said it would have made more sense for BT to do an
acquisition after launching its own mobile network, because the
value of competitors would likely decline as a result of the
competition. Therefore, the move could be seen as either an
admission of failure for its own mobile plans, or as a defensive
move against a competitor.
A Spanish media report on Tuesday said Telefónica was
negotiating taking at least $7.5 billion on top of a 20% stake in
BT in exchange for O2.
People familiar with the matter said the alternative to offering
an equity stake would be capital raising, which they said could
raise concerns of BT's pension trustees.
Bankers said an all-cash offer for O2 or EE would be too big of
a bite for the company, which they said has better uses for its
funds. One banker also noted that structure would be unusual, given
that Telefónica hasn't historically taken a minority stake in
exchange for assets.
BT might be willing to take an aggressive approach to financing
to become a pure "quadruple-play" operator that can cross-sell
telecom subscriptions with Internet and television packages,
analysts said.
"We see clear potential for revenue synergies from quad-play,"
said Maurice Patrick, a Barclays analyst, citing
retail-distribution savings and higher revenue from increased
customer loyalty.
But BT may also need complex funding arrangements, including
through debt securities, to reassure investors spooked by a bearish
outlook for European mobile, which has suffered under low consumer
confidence and stiff competition, Mr. Mattila said.
"Should BT include a cash component in any deal, we would not be
surprised to see some hybrid bonds as part of the funding mix here
in order to protect credit ratings," he said.
For Madrid-based Telefónica, a deal with BT would free up cash
for investments in Latin America's largest economies, where it has
a stronger competitive position. For Paris-based Orange, an exit
from the EE venture would also allow it to concentrate on markets
where it has a full quad-play position, said an analyst who didn't
wish to be identified.
"[Telecoms are] scaling up to remain competitive and struggling
businesses [are] having to refocus corporate strategy and sell
divisions to realize cash or reduce debt," said Jonathan Snade, an
attorney specializing in technology mergers and acquisitions at law
firm Thomas Eggar.
Shayndi Raice in London and Ruth Bender in Paris contributed to
this article.
Write to Simon Zekaria at simon.zekaria@wsj.com
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