BT in exclusive talks to acquire British mobile carrier EE

BT Group PLC started exclusive talks to acquire Deutsche Telekom AG and Orange SA's British wireless venture EE for £12.5-billion ($19.6-billion U.S.), moving ahead with a deal that's set to spur more mergers in the U.K. telecommunications market.

The payments, in cash and new BT shares, would be split equally between Deutsche Telekom and Orange, the companies said in separate statements Monday. BT would get EE's 28 million wireless customers. The period of exclusivity will last "several weeks" and any deal will need approval by BT shareholders, the London-based carrier said.

Deutsche Telekom and Orange beat Telefonica SA, which was negotiating to sell its U.K. division O2 to BT. A representative for Telefonica in Madrid declined to comment.

A takeover of EE would give BT access to the U.K.'s biggest mobile-phone operator and create the country's largest provider of bundles of mobile, home-phone, TV and Internet service. Europe's wireless and fixed-line providers are combining to boost customer loyalty and monthly bills as consumers increasingly buy different services from one provider.

"It's a very smart move from a strategic point of view to launch quad-play, and they picked an asset they know the value of very well," said Vincent Maulay, an analyst at Oddo & Cie. in Paris.

Maulay said the purchase price, at about eight times the target's earnings before interest, taxes, depreciation and amortization, topped his £12.2-billion estimate.

New Ownership

Deutsche Telekom will own 12 per cent of BT, and Orange 4 per cent plus a higher porportion of the cash payments. For the two sellers, a deal would mean the end of a four-year-old venture that was the first in the U.K. to offer high-speed, fourth-generation wireless service. Still, EE's revenue has fallen recently, dropping 2.5 per cent last quarter as prepaid customers defected.

The talks may result in more deals as rivals try to keep up. Vodafone Group PLC, the third-largest U.K. mobile provider after EE and O2, is considering options including a combination with John Malone's Liberty Global PLC, which operates the Virgin Media TV and broadband brand, people familiar with the matter have said. Hutchison Whampoa Ltd., owner of U.K. mobile provider Three, is also examining whether to pursue its own deals, people with knowledge of the situation said last month.

Cash Flow

BT reported net debt of about £7.1-billion at the end of September. The proposed payment in a mix of cash and shares is meant to help BT maintain its "conservative financial profile," it said. BT's debt is rated triple-B, the second-lowest investment grade, by Standard & Poor's and Fitch Ratings.

Britain's former phone monopoly has transformed itself over the past years, rolling out a high-speed fibre-optic broadband network and bidding for exclusive access to popular sports broadcasts. A deal may hurt BT's ability to pay for TV rights ahead of the U.K.'s Premier League soccer auction next year. In 2012, as BT prepared to unveil its new sports channels, the company agreed to pay £246-million a season for Premier League rights.

"Additional debt burden from a potential acquisition may weigh on BT's ability to aggressively bid for content," Bloomberg Industries analyst Erhan Gurses said in a note.

Resale Agreement

For now, wireless and fixed-line carriers in the U.K. are using wholesale partnerships to sell each other's services. Vodafone plans to resell BT Internet in conjunction with a TV service next year. EE added a TV set-top box to its mobile and Web packages, and BT is due to start reselling EE's mobile service – which it already offers to businesses – to consumers next year.

The same trend toward cross-selling services is taking off around Europe as mobile operators look for new ways to generate revenue. Slowing economies and price wars in several countries have led to sales declines. The U.K. has some of the lowest mobile prices in the European Union, according to the Organization for Economic Co-operation and Development.