By Simon Zekaria
LONDON-- BT Group PLC on Monday said it is in talks to buy
Telefónica SA's U.K. mobile business, 02, as the British telecom
incumbent lays out its ambitions to be a fully-fledged wireless
operator in the U.K.'s converging telecom market.
BT is already planning a return to consumer mobile next year,
but said it is exploring ways of "accelerating" its plans, which
includes assessing the merits of an acquisition of a mobile network
operator in the U.K.
The 168-year-old London-based group, responding to recent media
reports, said it had received "expressions of interest" from
shareholders in two U.K. mobile network operators, of which one is
O2, about a possible transaction in which BT would acquire its U.K.
mobile business. Analysts value 02 at around $14 billion.
O2, with more than 23 million customers, is the second-largest
U.K. wireless operator behind EE--a joint venture between Orange SA
and Deutsche Telekom AG--and ahead of Vodafone Group PLC and
Hutchison Whampoa Ltd.'s Three.
The other U.K. network operator being offered to BT is EE,
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 declined to comment. Orange and Deutsche Telekom
weren't available for comment.
"All discussions [with Telefónica] are at a highly preliminary
stage and there can be no certainty that any transaction will
occur," BT said in a statement.
BT confirmed the talks after a report in the Spanish media said
Telefónica is negotiating taking a 20% stake in BT in exchange for
O2. BT wasn't available for further comment.
Telefónica also confirmed the talks, saying they were at a "very
preliminary phase."
A deal for O2 would see BT reacquire a wireless business it
demerged in 2001, called BT Cellnet. Telefónica bought O2 in 2005
for GBP17.7 billion ($27.7 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 early afternoon London trading, BT shares rose 2.7% to 390.1
pence in a lower market. Telefónica shares were up 0.9% at
EUR12.59.
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 would not
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 has already reshuffled 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."
Christopher Bjork contributed to this article.
Write to Simon Zekaria at simon.zekaria@wsj.com
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