By Simon Zekaria and Christopher Bjork
LONDON-- BT Group PLC is in early talks to buy Telefónica SA's
U.K. mobile business, O2, as the two former monopolies move to
shuffle their product offerings in a converging U.K.
telecommunications market.
The transaction, if it goes ahead, would see the return of BT to
consumer mobile services more than a decade after the 168-year old
London-based group spun off a then-struggling cellphone operator
that was O2's predecessor. For Madrid-based Telefónica, it would
free up cash for investments in markets where it has a stronger
competitive position, such as in Latin America's largest economies.
Analysts value O2 at roughly $14 billion.
The two companies confirmed the talks in brief statements
Monday. BT also said a second U.K. cellphone operator also had
expressed interest in a potential sale. The other suitor being
offered to BT is EE, a joint venture between Orange SA and Deutsche
Telecom AG, according to a person familiar with the matter, which
would bring together the U.K.'s biggest fixed-line operator and
largest mobile operator.
EE, valued at $17 billion by analysts, declined to comment.
Orange and Deutsche Telekom weren't available for comment.
With over 23 million customers, O2, is the second-largest U.K.
wireless operator behind EE. Vodafone Group PLC and Hutchison
Whampoa Ltd.'s Three complete the domestic Big Four.
BT was already planning to start offering mobile phone
subscriptions to customers next year, through a leasing deal with
EE's network. But it said Monday it is exploring ways of
"accelerating" its plans by assessing the merits of an acquisition
of a wireless network operator.
The two companies confirmed the talks after a report in the
Spanish media said Telefónica was negotiating taking a 20% stake in
BT in exchange for O2.
A deal for O2 would see BT reacquire a business it spun off in
2001. Telefónica bought O2 in 2005 for GBP17.7 billion ($27.7
billion). Telefónica then also acquired a large wireless operation
in Germany that is excluded from the deal currently under
discussion.
Earlier this month, O2 said total mobile customers increased 3%
year-over-year to 24.1 million at the end of September 2014.
Third-quarter revenue, excluding the impact of the operator's
tariff plan that splits out device and service costs, rose 2.3%
year-over-year to GBP1.43 billion.
Earlier this month, O2 said total mobile customers increased 3%
year-over-year to 24.1 million at the end of September 2014.
Third-quarter revenue, excluding the impact of the operator's
tariff plan that splits out device and service costs, rose 2.3%
year-over-year to GBP1.43 billion.
In midafternoon London trading, BT shares rose 3.5% to 393.3
pence in a lower market. Telefónica shares were up 1.4% at
EUR12.65.
Citi analyst Simon Weeden said BT would need cost savings to
make any deal profitable because of the U.K. mobile sector's low
margins, adding that extra funding might be required. "We wouldn't
rule out a capital increase at BT to pay for an acquisition of this
size," he said.
"A sale would allow Telefónica to focus more resources on
markets where it has a competitive advantage, such as Brazil,
Colombia, Mexico and Germany," said Javier Borrachero at Kepler
Cheuvreux. Mr. Borrachero added the group is better off leaving the
U.K. market during the current deal-making wave than trying to bulk
up.
Telefónica--which has more than 300 million customers in Latin
America and Europe--has already written big checks to bolster its
businesses in Germany and Brazil, becoming a leading player
there.
In Germany, it spent EUR8.1 billion ($10.6 billion) last year on
E-Plus, a mobile carrier previously owned by KPN NV. And earlier
this year in Brazil, it paid EUR7.24 billion for Vivendi SA's GVT.
Over the same period, the Madrid-based company sold units in the
Czech Republic and Ireland that lacked sufficient scale.
BT offers retail consumers so-called triple-play services of
fixed phone, Internet broadband and television, and competes for
subscribers with rivals such as Liberty Global PLC's cable operator
Virgin Media and pay-TV giant Sky PLC. It has invested billions of
dollars into sports channels and recently signed a partnership with
U.S. streaming platform Netflix Inc. to lever up its premium fiber
services. Next year, through a leasing deal with EE's network, it
plans to launch a consumer mobile offer to supplement its existing
business service.
Last week, senior executives from the parent companies of both
O2 and EE cast doubt on their futures.
Telefónica said it would consider all strategic choices for its
U.K. operations, including a possible sale, should Britain's
telecom operators continue to add fixed-line assets and television
content to their wireless services.
"If the U.K. is to be a convergent market, then we need to
evaluate all possibilities," said Telefónica's Chief Operating
Officer José María Álvarez-Pallete, speaking at the Morgan Stanley
telecom, media and technology conference in Barcelona.
And Orange Chief Executive Stéphane Richard said the 50-50 EE
mobile venture isn't a long-term plan, adding that "all options are
open" including a public listing or merger and acquisition
deal.
"This could be the moment that commitment to the U.K. mobile
market finally cracks and we see parent companies starting to
exit," said Citi's Mr. Weeden. "BT is unusual, if not globally
unique, in being a fixed-line incumbent without its own mobile
network operator."
Unlike countries such as Spain and Germany, U.K. telecom
operators have yet to fully embrace so-called quadruple play offers
of fixed telephony, mobile, broadband Internet and television. But
rivals Vodafone and EE are moving into the space. Virgin Media and
telecom group TalkTalk also participate in "quad" play.
European telecom operators are eager to move into broadband and
media services outside their core telephony business to jump-start
flagging revenues across the continent's anemic wireless markets.
Bundled services are also perceived to boost subscriber revenue and
increasing customer loyalty.
Bold market moves are buoyed by favorable sentiment, says
Barclays analyst Maurice Patrick. "Following years of relentless
earnings pressure driven by macro, competition, regulation and
technology, we believe the tide is finally turning positive."
Still, despite improving trends, analysts say BT's moves may be
partly forced by moves by rivals and the risk of being left
behind.
"Defensively, BT has [mobile] covered through the [EE mobile
virtual network deal] anyway. It would be a strange decision to do
this because of quad-play," said Enders Analysis analyst James
Barford. "Part of the justification is likely to be an ability to
cross-sell products."
BT has invested GBP200 million in radio spectrum at the higher
end of the cellular range, analysts say, with the frequencies
suitable for short-ranged, high speed mobile that use the fastest
fourth-generation wireless technology, otherwise known as
"long-term evolution," that is booming data revenues for telecoms
in Europe.
Marketing decision-making is also key, added Mr. Barford.
"The issue BT had was that its brand isn't very appealing
towards younger people," he said. "There is a risk that if it
rebranded [the mobile service as] BT that wouldn't be appealing to
a significant part of the O2 base. With EE, there isn't such an
issue."
Write to Simon Zekaria at simon.zekaria@wsj.com and Christopher
Bjork at christopher.bjork@wsj.com
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