BT bills could rise AGAIN if it pulls off deal to buy Britain's biggest mobile operator EE for £12.5bn
BT has entered into exclusive talks with Orange and Deutsche Telecom to buy EE in a £12.5billion cash and share deal - sparking fears the cost of its expansion into mobile will mean higher bills for customers.
The telecoms firm's shares rose 5.8p to 403.8p after it brought to an end weeks of speculation by saying it was in talks with the two mobile phone companies to acquire EE. It decided to plump for Britain’s largest operator over Telefonica-owned O2, formerly called Cellnet.
BT has recently undergone aggressive expansion, buying rights to Premier League football for its new sports channels. This has been funded in part by repeated, inflation-busting rises for existing customers – which began just weeks after the launch of BT Sport. This month saw standard line rental for direct debit customers rise by a further 6 per cent.
Mobile deal: BT has entered into talks with Orange and Deutsche Telecom to buy EE in a £12.5 billion deal.
Some are concerned BT's purchase of EE could mean less competition in the market, and the telecoms giant could use its increased dominance to hike prices.
Following news of the EE talks, a senior City figure said: 'It is quite possible they will use this as an opportunity to raise the prices of the line rentals but they won’t be as insensitive as to do it straight away.'
EE was formed in 2010, following a merger of French firm Orange and T-Mobile, which is part of the German company Deutsche Telekom. It has some 25million UK mobile phone accounts, and owns the country's largest and best-developed high-speed 4G mobile data network.
However, it also has the worst customer satisfaction levels among mobile phone providers, according to regulator Ofcom's latest figures; just 69 per cent approve of their service, compared with 78 per cent at O2.
Its prospective new owner, BT, won Money Mail readers' Wooden Spoon Award in 2013 for the worst customer service in Britain.
The firm, which has nearly 10million landline and broadband customers, admitted that it had struggled to deal with a flood of new accounts after the launch of BT Sport.
In a statement on EE published after the stock market closed last night, BT said: '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.'
Orange and Deutsche had previously considered floating EE on the London Stock Exchange, but put the plans on ice more than a year ago.
BT divested Cellnet more than a decade ago after finding itself facing a £30billion debt mountain.
In a change of strategy the company had said it planned to re-enter the market next year in order to be able to offer all four services - mobile, home internet, landline and TV – in a single package.
Gautam Srivastava, communications analyst at MoneySuperMarket, said: 'BT has been looking to beef up its mobile offering of late in an attempt to offer customers all their communication needs in one place and EE’s mobile 4G footprint would allow them to do just that.
'If the sale goes through, this is a hefty commitment from BT in their bid to be the 'quad play' provider (a provider of whom offers home phone, fixed line broadband, mobile phone and TV) of choice.
'Currently only Virgin Media, EE and TalkTalk offer all four services with none doing all well – BT is aiming to change that and become the first true one-stop-comms-shop.'
But Srivastava warned: 'One potential disadvantage for customers would be that they would be bedded in with BT – meaning if they weren’t happy with one of the services they were receiving they could find issues in moving to a new provider.'
BT wants to sell new mobiles to existing customers and had also investigated growing its own mobile network.
Quad Play: BT wants to offer home phones, broadband, mobile phones and TV in linked packages
The firm said: 'While continuing these exclusive discussions, BT will progress its own plans for providing fixed-mobile for businesses and consumers, in line with previous announcements.
'It remains confident of delivering on these plans should a transaction not take place.'
The key headline terms for EE, which are non-binding, include a purchase price of £12.5billion.
This 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 per cent stake in BT and would be entitled to appoint one member to the board of BT. Orange would hold a 4 per cent stake.
BT hopes the deal would bring it a raft of savings in buying, marketing, and sales from negotiating better deals from being a bigger business. Its costs would also be cheaper from using its existing call centres and IT.
Dominic Baliszewski, telecoms expert at broadbandchoices.co.uk, said: 'Quad-play does have the potential to save customers a great deal of money and BT in particular has the infrastructure at its disposal to offer some truly compelling pricing alongside robust coverage.
'Throw in some tasty freebies in a similar vein to the "free BT Sport" offer of the previous 12 months and you have a tempting proposition.'
Bigger business: BT boss Gavin Patterson will be hoping the EE purchase brings a raft of savings in buying, marketing and sales from negotiating better deals
But he added: 'It is important that customers are not dazzled by the marketing surrounding quad-play. Bundles are cheaper because providers want to avoid customer churn, but do stay focused on what you need from a mobile phone service: quality of coverage, network speed and a generous data allowance are all just as important as how much you actually pay.
'Should this deal go ahead, millions of people who are both EE mobile customers and BT broadband/TV customers already will effectively become triple or quad play BT customers without even blinking.
'If you find yourself in this situation, don’t feel rushed or pressured into signing up to a new contract. BT will likely offer some very attractive customer retention deals but it is always worth taking the time to compare and understand what you need versus what you want – especially in an increasingly complicated market.'
Income shares watch: BT hiked its half-year dividend by 15 per cent to 3.9p when it announced interim results in October. The shares yield 2.87 per cent.
View from the City:
'The 4G capabilities of EE’s mobile network appear to be a major attraction for BT,' said Keith Bowman, equity analyst at Hargreaves Lansdown Stockbrokers.
'The network would compliment its own fixed-line assets, potentially moving BT back to the UK’s premier telecommunications company. BT may look to pay for the possible acquisition through either a rights issue or a placing, offering investors an opportunity to add to existing holdings.
'On the downside, regulatory issues could be raised, whilst the transparency of product pricing for consumers may be lost going forward.
'In all, and with BT now placing pressure on its arch rival Sky with its interest in Premiership football rights, consensus analyst opinion remains highly favourable in tone, pointing towards a strong buy.'
UBS analysts believe BT opted for EE over O2 UK because it has the largest subscriber base, the largest spectrum holding and the most developed 4G subscriber base.
'We see the deal as positive for DT/Orange given the higher than expected value for EE,' said UBS.
City reaction: Investors and pundits make positive noises about BT's move on EE
'In terms of other operators, we think Vodafone/Sky are moving closer to a commercial partnership in the UK. We think the UK is important for Telefonica and do not expect it to sell O2 UK – O2 UK could partner with Sky if nothing materialises with Vodafone, alternatively O2 UK could consider closer ties with TalkTalk.'
BT's deal also got a nod of approval from star fund manager Neil Woodford's investment house, Woodford Investment Management.
In a blog post on its website, the fund manager said it gave BT an opportunity to become a leading player in the quad-play market.
Woodford, a top 20 investor in BT, added that there were substantial cost synergies, particularly in areas such as IT, back office and procurement.
It added that the management team of BT had 'done a great job' for shareholders and it was 'very confident' in the firm's long-term prospects.
Woodford's £3.74billion Woodford Equity Income fund had about £218million invested in BT at the end of November, making it one of the fund's top five bets, according to the fund's factsheet.
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