BT in talks to buy EE for £12.5bn

Telecoms giant BT vies to get back into mobile communications 12 years after it floated-off O2

Telecoms giant BT is set to get back into mobile communications with a £12.5bn acquisition of EE, the mobile telecoms company formed by the UK mergers of T-Mobile and Orange.

The company revealed today that it is in exclusive talks to buy the company from its joint owners, Germany's Deutsche Telekom and France Telecom-owned Orange, after having previously considered the re-purchase of O2 from Telefonica, who bought the company in 2005.

EE is the biggest mobile phone operator in the UK with some 24.5 million subscribers - ahead of Vodafone in second place with 19.5 billion - with a market share of 33.8 per cent by revenue, according to investment bank Citigroup.

In a statement to the London Stock Exchange today, the company said that it had "entered into an exclusivity agreement with Deutsche Telekom and Orange in relation to BT's possible acquisition of all of their UK mobile business, EE. The period of exclusivity will last several weeks allowing BT to complete its due diligence and for negotiations on a definitive agreement to be concluded.communications services to customers - especially as the popularity of home-phone connections has plunged as mobile phone penetration reaches 100 per cent in the UK.

"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, wi-fi and 4G. BT would own the UK's most advanced 4G network, giving it greater control in terms of future investment and product innovation," it continued.

However, the structure of the deal will leave Deutsche Telekom and Orange with a combined 16 per cent share stake in BT.

"The key headline terms, which are non-binding, include a purchase price of £12.5bn for EE on a debt/cash free basis. The consideration for EE will be payable as a combination of cash and new BT ordinary shares issued to both Deutsche Telekom and Orange. Following the transaction, Deutsche Telekom would hold a 12% stake in BT and would be entitled to appoint one member of the BT Board of Directors. Orange would hold a 4% stake in BT."

Costs will be cut in terms of network and IT rationalisation, according to the statement, back-office consolidation, and savings in procurement, marketing and sales costs. "In addition, BT expects to generate revenue synergies through selling fixed-line services to those EE customers who do not currently take a service from BT, and by accelerating the sale of converged fixed-mobile services to BT's existing consumer and business customers."

However, the deal will be subject to the approval of competition authorities in both the UK and (presumably) the EU - especially given that EE is the fifth largest ISP in the UK with 793,000 subscribers as of November 2014, and BT the biggest, with 7.473m. It also owns the cut-price ISP Plusnet which, despite being cheaper than BT, generally enjoys higher satisfaction ratings.

It comes 14 years after BT floated-off its home-grown mobile telecoms company, Cellnet, which it had renamed O2, in a bid to cut its debt pile following an ill-advised acquisition spree in the late 1990s. O2 had been founded in 1985 as Cellnet as a 60:40 joint venture between it and Securicor.

After it offloaded O2, BT tried to build a retail mobile virtual network operator, piggybacking off of EE's network in a similar fashion to Virgin Mobile and GiffGaff. That, however, failed due to high pricing, although BT uses EE for mobile network services for corporate customers.

BT had also enquired about acquiring O2 back from Telefonica, which took-over the company in 2005, and had also faced competition from Hutchison Whampoa-owned Three.