by Caroline Gabriel, Research Director, Maravedis-Rethink
UK landline incumbent BT is serious about getting back into the mobile market, and could buy back O2 from Telefonica, or even acquire its current MVNO host, EE.
A deal for BT to acquire O2 – which it spun off in 2002 (when it was still Cellnet), and which was subsequently snapped up by Telefonica of Spain – is one of the UK rumor mill’s favorite stories, but this time, BT has acknowledged that talks are being held, though it cautioned: “All discussions are at a highly preliminary stage and there can be no certainty that any transaction will occur.”
The telco also said it had been approached by another network, which unconfirmed reports suggest might be EE, the largest UK mobile carrier, with which BT recently agreed a wide-ranging MVNO deal. This arrangement, together with BT’s own spectrum holdings in 2.6GHz, and its extensive WiFi build-out, are supporting a return to the consumer business sector and the beginnings of a quad play. BT is already the broadband market leader and last year entered the pay-TV space aggressively with a series of content deals, particularly in sports, to hit at the main providers, Virgin Media and BSkyB.
In building quad play bundles, BT will come into competition with its own partner, EE, as well as with Virgin, plus Vodafone and broadband provider TalkTalk have also recently announced plans in this direction. A merger with EE would certainly put BT ahead of the pack, since the two firms are highly complementary – although the regulator might look askance at the largest mobile and largest fixed-line networks combining. EE’s joint venture parents, France Telecom and Deutsche Telekom, have indicated they could eventually sell or IPO their UK operation, and with UK competition mounting and a French-style price war threatening, they could decide this was a good time to get out, for the right price.
The more advanced talks, according to the reports, are with Telefonica. Apart from the nostalgia factor of BT reuniting with the mobile arm it (rashly) cast off, this deal appears to have fewer advantages, apart from probably being more attractive to competition authorities. O2 has not ventured down the quad play route and has retreated from fixed broadband, but it would bring the second biggest mobile subscriber base to a new parent, plus some strong MVNO customers like Tesco Mobile and its own internal low cost brand, GiffGaff. That would enable BT to target several customer bases which might otherwise dilute its core mobile brand.
The two companies would also be a powerful force in WiFi, which is increasingly strategic to the economics of telecoms services by reducing the data on cellular networks. For MNOs that means lower cost of data delivery, especially for high volume, low value data and subscribers; and for fixed-line operators, it means lower MVNO fees and the chance to compete directly with cellcos for key revenues, especially in urban areas.
Telefonica is looking for ways to raise money to reduce debt at home and expand in Latin America, and will also be aware that the best days are over in the UK, which is heading for a pricing bloodbath like the one which has shaken up the French carriers.
The Spanish player was reticent though, saying in a statement to the Spanish stock market: “Telefonica informs that, although it is in talks with British Telecom, these talks are in a highly preliminary phase and there is no certainty that a transaction will take place.”
If a deal transpires, it is likely that either Telefonica or FT/DT would retain some stake in the valuable UK market, and that it would spark acquisitions or alliances in response, particularly by BSkyB, Three and Vodafone, which would be most disadvantaged.