Eyeing Up O2, BT Is Also In ‘Exploratory Discussions’ To Buy EE

Earlier this week, it emerged that UK carrier BT was eyeing up buying a mobile carrier to expand its existing fixed line business, and that O2 was one of the two under consideration. Today we have confirmation of the other one: it is EE, the UK joint venture between France Telecom’s Orange and Deutsche Telekom’s T-Mobile.

The larger market share of EE, at around 34% of all UK subscribers to O2’s 26%, could mean the difference in price of about £1 billion, with Reuters pegging the price for EE at £10 billion and O2 at £9 billion.

According to a statement released by Orange and DT (and later posted by EE as well), the parties are in “highly preliminary exploratory discussions”:

“Deutsche Telekom AG and Orange SA, the joint shareholders of EE Ltd, regularly analyse the development of the market in which EE operates, evaluating various strategic options which have the potential to create value for EE’s shareholders and strengthen the market position of EE,” Orange noted. “As one of these options, Deutsche Telekom AG and Orange SA are having highly preliminary exploratory discussions with British Telecom,  although it is too early to state whether any transaction may occur. Deutsche Telekom and Orange will make further announcements if and when  appropriate.”

BT would not comment further except to “confirm the veracity of EE’s statement.”

Today’s development should come as no surprise.

Asking around after the news broke about O2, we’d heard from a few different sources that the second carrier was EE. (The reason why BT and O2 came out with their statement earlier this week, and the statement was made today, was because enough of these rumors start moving market pricing and they are obliged by law to make a statement.)

BT’s stock is up 3% at the time of writing, currently trading at £407.80/share on the LSE. Orange is down about 0.76%, Deutsche Telekom is up nearly 1%, and Telefonica is down about 1% too.

DT and FT had long been considering how and if they could spin off the JV as a public listing, with that idea getting revived as recently as last month. So a logical alternative exit would be a sale to another carrier, or someone else willing to take on the business. And leading up to today’s story, many were already reporting as fact EE as mobile telco option number two.

Another name that has been floated in the past as an interested party, by the way, was AT&T, and it will be interesting to see if that comes up again.

EE, as you might recall, was formed in 2010 when the two carriers merged their UK businesses in an attempt to have better economies of scale through lower operational costs, consolidated mobile networks, and more buying clout with handset makers. Originally it was clumsily called “Everything Everywhere”, eventually it shorted its name to just “EE.”

The hopes were bright for EE in its early days and there was even talk of how the collaboration could extend to other markets. But tides have been changing for European carriers — the same tides that are leading Telefonica to consider a sale of its own UK operation.

The European market is mature and largely saturated in terms of growth, which basically means competition based on price and lower margins.

Plus, regulators have been pressuring carriers to bring down rates in one of the only places where they were getting great returns: roaming. It’s not really a surprise that Telefonica is focusing more on its business in Latin America and France Telekom and Deutsche Telekom are rethinking investing more in a JV.

That leaves the question of why BT is interested in buying either.

There is an argument for an incumbent player in a single market, who is already strong in that position, to bundle more services together.

Ironically, years ago, BT saw things differently and spun off its mobile operation, O2 (previous name: BT Cellnet). These days, however, the promise of triple and quad-play services — combining phone, broadband, mobile and TV — has finally become a reality, with carriers in all mature markets positioning themselves as a one-stop shop for all of a consumer’s or business’s connectivity and communication needs. In its last earnings, BT beat analysts’ expectations and saw profit increase in part because of a boost from its TV services — another vote of confidence for a bundled offering.

BT, which currently offers mobile services by way of a resale agreement with Vodafone EE (which nabbed the contract from Vodafone earlier this year), could face potentially much more interesting prospects if it can swing network and customer ownership of all four and consolidate users across its own network with those of whichever carrier it buys (if either).

Bundled offerings to improve service margins is something that both O2 and EE have been pushing on, too. EE offers home broadband and TV services alongside its mobile offerings, and O2 markets mobile broadband as a potential replacement for wired offerings.

It’s also a route that’s been taken by Virgin Media, one of BT’s big competitors in the pay-TV market.

While O2 feels like it could be the favorite because of its position as the legacy BT carrier, coming back into the fold as it were, EE has something attractive for BT, if the acquisition is about looking ahead to “new wave” revenues, as BT has called emerging services in the past: EE has 5.6 million 4G subscribers, the highest number of any carrier in Europe.

However, in its last quarter, reported October 22, EE’s operating revenues were flat on a year ago, and actually down when weighing in the impact of regulatory-mandated cost cuts.

Indeed, the bigger picture here is that the UK market, which now has four carriers — EE, O2, Vodafone and Three — is ripe for more consolidation. Ironically, this deal, whichever way it goes, and if regulators approve it, is not really going to change that picture one way or the other. For the short term, at least.