BT in talks to buy O2

BT is in talks with reclaim ownership of O2, the mobile operator it span off more than a decade ago, for an estimated £9bn, it was revealed on Monday.

A deal would cement its position as Britain’s most powerful provider of telecoms and media services and lay the ground for a round of major mergers.

At the same time as holding discussions with Telefonica, the Spanish owner of O2, BT said it had been approached by the owners of another mobile operator looking to sell.

It is understood the second target of BT’s machinations is EE, Britain’s biggest mobile operator, which is jointly owned by Deutsche Telekom and Orange.

News of the negotiations with Telefonica was leaked in Spain but BT moved quickly to reveal the second approach and apparently play the two would-be sellers off against each other. Both are seeking to offload their UK operations with BT already preparing to re-enter the consumer mobile market next year.

BT is relatively financially powerful thanks to its ownership of the national fixed-line telecoms network, taking a cut of the profit of every broadband subscription. It has been issuing thinly-veiled warnings that it will significantly undercut rivals when it re-enters mobile.

The company's strength is in contrast to its difficult position in 2001, when it decided to spin off O2, then BT Cellnet, to pay down debts.

^{BT shares spiked nearly 3pc on the news on Monday morning}

Analysts said full ownership of a mobile network would put BT in the lead in the industry’s rapid shift towards ‘quad-play’ packages of broadband, home phone, mobile and television. It is already the biggest fixed-line operator and has invested £2bn in sports rights to loosen Sky’s grip on the pay-TV market.

It would also give BT an instant nationwide retail footprint comprising hundreds of stores to sell the benefits of ‘quad-play’ to British consumers, who have so far given the idea a cool reception. Telecoms companies see adding more services to packages as a way to increase customer loyaly.

Jerry Dellis, a telecoms analysts at Jefferies, said buying a network rather than attempting to build up its own customer base from scratch as a challenger brand was “a big opportunity to plug the strategic gap in mobile much faster with less execution risk”. It would allow BT to cross-sell broadband and pay-TV to O2’s 13 million contract subscribers, for instance.

Playing off O2 and EE meant BT was “well-placed to drive discussions to a rapid conclusion”, Mr Dellis added. Jefferies estimated that O2 would be valued at £9bn based on 6.5 times its earnings before interest, taxes, depreciation, and amortisation.

BT said in an announcement to the stock market that “all discussions are at a highly preliminary stage and there can be no certainty that any transaction will occur”.

City sources said that O2 would be a more attractive takeover for BT than EE. Several telecoms banking sources cited BT and O2’s shared history, readily available synergies resulting from a 10-year data carriage deal and the strength of the mobile operator’s brand.

On the other hand, EE has already signed a deal with BT to provide wholesale 4G network access for its mobile launch next year.

BT would be likely to fund either acquisition with equity rather than cash, as it is already spending heavily on sport, with a Premier League rights auction and further inflation looming early next year.

It also faces a significant increase in the annual bill to cover the shortfall in its massive pension fund as a result of an ongoing review. Analysts have estimated it could pay out more than an extra £700m per year.

O2 would cost about 20pc of BT’s equity on its current valuation, which would give heavily indebted Telefonica, Spain’s former state monopoly, significant sway over Britain’s former state monopoly.

Confirmation of the talks triggered a wave of excitement in the City on Monday as bankers predicted a deal would trigger a wave of large-scale media and telecoms consolidation in response. Various combinations of EE, ITV, Liberty Global, Sky, TalkTalk, Three and Vodafone were being suggested.