BT shareholders give lukewarm reaction to mobile talks

 

BT Group’s acquisition talks with two separate mobile phone service providers are at an early stage.

If anything comes of them, the UK’s incumbent telecom will extend its strategy of planting, or re-planting flags on ever more diverse parts of the communications sphere.

Right now that still looks like quite a big ‘if’.

 

 

EE or O2, not both

What we know for sure, so far, is that BT has announced it is in early stage talks with Spain’s Telefonica over a deal to buy UK mobile operator O2.

BT had spun off the firm which O2 is the successor of more than a decade ago.

Additionally, there are reports that BT also began negotiations with EE, a relative newcomer to the UK’s mobile phone landscape, after being created by subsidiaries of France’s Orange and Germany’s T-Mobile. (The latter group is in turn owned by Deutsche Telekom).

BT hasn’t yet officially disclosed these second talks.

It appears highly unlikely BT would seek to purchase both O2 and EE, although the group hasn’t confirmed whether it is seeking to purchase one, the other, both or indeed either of the firms.

It would need to choose either O2 or EE as the combination of both would likely be blocked by competition regulators.

O2 could potentially be the easier choice since it undoubtedly would be valued less and has only one owner, not to mention an owner that has made clear it wishes to sell.

“We have received expressions of interest from shareholders in two UK mobile network operators, of which one is O2, about a possible transaction in which BT would acquire their UK mobile business,” BT said.

 

The Logic

Either way, it has become clear of late that BT wants to go (back into) mobile.

As consumer telecom services evolve around the world, there has been an unmistakeable trend for people to demand more from their service providers, including in the UK.

The effect of this has been that companies have begun to expand the range of services they offer, most obviously seen in firms seeking to provide both fixed-line broadband and mobile services to customers.

BT itself has recognised these trends by buying £2bn of sports rights in its launch of TV services for broadband customers.

It has also realised that its former strategy that involved the divestment of any sort of mobile service, has left it out of step with its rivals.

It has already stated that it plans to launch mobile services.

Both EE and Vodafone are launching their own broadband and TV services in the UK.

If market trends are taken to their logical conclusion, regardless of whether the potential deals revealed today are realised, it seems likely at some point that the recently consolidated Sky Plc. will have to enter the mobile fray at some point.

 

 

Watch for smoke signals

But we are probably getting quite far ahead of ourselves.

After all, it looks like both Telefonica and BT only confirmed these talks after being ‘busted’ by the website of Spain’s El Confidencial newspaper, which said O2 could be sold in return for a 20% stake in BT as part of a “strategic alliance” to strengthen the two groups.

Whether or not an all-share transaction at such a ratio accurately represents the content of the discussions, the news highlights the tentative nature of the talks.

We also need to add into our reckoning the fact that the UK’s competition watchdog, the Competition & Markets Authority will be obliged to scrutinise almost any UK takeover undertaken by BT more strictly than it oversees BT’s deals that do not directly impact the UK consumer.

In practice this should mean we reduce the probability of any of the mooted deals taking place, to say 50%, in the absence of further information.

 

 

 

Welcome to the BT pension scheme

Another factor that BT would have in mind during any merger negotiations would be the potential weight added to its pension liabilities, especially given that the UK firm has the biggest defined benefit pension plan of any UK public company.

EE’s pension situation may be relatively modest, judging by its end-2013 financial statement, which shows a pension liability of £52m.

However, Telefonica Group’s annual report for last year shows post-employment defined benefit obligations (pension payments) for the UK as totalling €1.251bn with assets of €1.236bn.

The obligation rose from €1.139bn the year before, whilst assets also rose from €1.191bn.

 

 

BT shareholders: “Interesting….”

BT shareholders seem interested if not bowled over by today’s news.

The shares have traded more than 3% higher in reaction to the news since it emerged.

Telefonica’s shareholders seem less interested and even less bowled over.

That telecom’s shares are trading a modest 1.7% higher, signalling that the £17.7bn Telefonica paid for O2 in 2005 is not far from their minds.

There’s absolutely no chance of that figure being matched, apart from maybe by moving a decimal and multiplying by say, 5.5.

(Update on Tuesday 25th November : I realised my earlier assessment of the likely asking price O2 could fetch was too parsimonious and I raised the multiple of 2014 EBITDA a buyer would probably pay to slightly less than 6.5 times from around 4 times.)

Still, TEF’s shareholders are not signalling an easy win.

 

 

Against this backdrop, the UK telecom’s shares may have dug itself deeper into the gently sloping channel it has traded within this year, with 400p now looking like significant overhead which the stock has failed to sustainably breach over the period.

 

 

Interestingly the City Index Daily Funded Trade in BT Group also seems reluctant to approach the equivalent of 400p. The trade has paused around 393 since this morning.