BT Group plc.; market cap (as of 20/02/2015): $54.66bn
Introduction
On February 5th, 2015, BT agreed to acquire the British network operator EE from Deutsche Telekom and Orange in a £12.5bn (US$19bn) deal to form the leading telecommunication provider in the UK.
Companies’ Overview
British Telecom Group, is the world’s oldest multinational telecommunications company headquartered in London. Despite the UK being BT’s largest market, the group operates in more than 170 countries across the globe and offers a wide variety of products including fixed line, broadband and television services. From 2008 onward, the group has engaged in several transactions, most notably acquisitions of Infonet and Albacom, to expand its line of products and develop its leading position in the TMT industry geographically. In 2012 it starts threatening the dominance of British Sky on live football by entering the television business, acquiring US$2bn of sports rights, including coverage of Premier League Football, and, in November 2013 granting from BSkyB for £900m the rights to screen Champions League games over three years.
On the other hand, EE is the UK’s largest mobile network operator and internet service provider with 31m mobile customers. To maintain its dominant market position, the firm has been investing heavily in infrastructure and modernising its network in the UK, becoming the 4G operator with the largest customer base in Europe. BT’s acquisition of EE marks the company’s return to the UK mobile industry after it spun off its previous mobile business, Cellnet, over a decade ago.
The Deal in Details
The consideration comprised a £6.2bn cash payment to Deutsche Telekom, financed partially by issuing £1.5bn worth of shares, and a combined share and cash deal with Orange. Indeed, Deutsche Telekom will become a 12% shareholder of BT, whereas Orange will hold 4% shares of the British operator. The consideration of US$19bn, less the NPV of synergies and after integration costs, values EE at a 2014E EBITDA multiple of 6.0x, and at about 8.0x without subtracting synergies and integration costs from the price. The transaction is expected to be EPS accretive only from the second year after completion because of high depreciation charges borne by EE with regards to its recent infrastructure investments. The market has positively gauged the acquisition, raising BT’s share price about 5% on the day.
An Eye on the Future
Given BT and EE’s assets are highly complementary, with BT possessing extensive broadband infrastructure while EE provides modern 4G network capabilities, BT will be able to deliver customers a quad-play service (broadband, TV, mobile and landline) and to cross-sell products to EE’s existing clients to realize potential revenue synergies. A BT spokesperson reiterated this rationale by stating on behalf of the board, “the proposed acquisition would enable BT to accelerate its existing mobility strategy whereby customers will benefit from innovative, seamless services that combine the power of fibre broadband, WiFi and 4G.” Unlike in countries such as Spain and Germany, UK’s telecom operators have yet to fully embraced quadruple-play packages. Companies such as Sky and TalkTalk are still focused on three out of four services, and the only true “complete” operator is Virgin whose mobile market share is small. Many experts believe that quad-play is the future. That being said, the BT/EE marriage would create the largest quad-play team by a decent margin and may trigger a spate of similar deals, pushing the industry a situation towards a situation where few giant players share out a unique loot, with potentially dangerous consequences for competition. Despite these considerations, the deal will most probably not cause regulatory issues as BT’s extensive broadband network is already monitored by the British supervisory body Ofcom. With respect to customers, the immediate future will certainly result in lower prices for quad-play contracts, but signing multiple services contract will make it difficult to change operator further down the line, resulting in increasing switching costs and hence reduce costumer mobility.
Financial Advisors
Goldman Sachs, JPMorgan Chase and Perella Weinberg advised BT. Morgan Stanley and Bank of America Merrill Lynch acted as advisers to Orange. Deutsche Telekom was advised by Barclays and Citi.
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