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Telefónica, Spain’s biggest phone company, could sell O2 to BT in return for a 20% stake in the UK company. BT’s market value is almost £32bn. Photograph: Tara Moore/Getty Images
Telefónica, Spain’s biggest phone company, could sell O2 to BT in return for a 20% stake in the UK company. BT’s market value is almost £32bn. Photograph: Tara Moore/Getty Images

BT in talks with Telefónica to buy O2

This article is more than 9 years old

Shares in British telecoms company leap after it confirms talks with O2 owner and also with EE

BT is considering buying back O2, the mobile phone operator it owned until 2001, in a deal that would reverse what has been described as one of the worst strategic errors in UK corporate history.

The former telecoms monopoly is so determined to regain a foothold in the mobile phone business it is also in parallel talks to acquire EE, Britain’s biggest mobile phone firm, as it explores ways to offer a single package of television, broadband, landline and mobile telephones.

The four-way package, which the industry has dubbed “quad-play”, is now viewed as a must-have for success as consumers increasingly prefer to get all their telecoms, television and digital services from one place.

BT’s move comes just two years after it unexpectedly marched into the TV business, putting £2bn on the table to secure key sports rights, including Premier League football. A year later it put up £900m for the rights to screen the Champions League. The BT executive who masterminded the move into football, Gavin Paterson, has since taken over as chief executive of the business and it is his decision to move back into the mobile business.

Kester Mann, an analyst at research firm CCS Insight, said if BT bought a mobile phone network it would worry Sky and Virgin. “Purchasing O2 or EE would give BT a strong mobile arm to support its quad-play strategy. With its fixed-line and TV assets, it could assume a very dominant position. Rivals such as TalkTalk, Virgin, Sky and Vodafone will be concerned.”

BT was forced to admit on Monday that it was in negotiations with two mobile operators, after its talks with O2’s owner Telefónica were revealed by a Spanish website, El Confidencial .

The report said that Spain’s biggest phone company might sell O2 to BT in return for a 20% stake in the UK company. Industry insiders later confirmed that talks with EE’s owners – Deutsche Telekom and France’s Orange – were also under way.

Taking over O2 could value the company, Britain’s second-biggest mobile group, at more than £10bn. O2 has more than 23 million customers, while EE, which was formed when Orange and T-Mobile were combined in 2011, has around 27 million users. BT also has more than 7m broadband customers and around 1m TV subscribers.

Telefónica also confirmed the talks, but echoed BT’s insistence that they were at an early stage. EE declined to comment.

In a statement to the stock exchange BT said: “We continue to develop our own plans for providing enhanced mobile services to business and consumer customers. We have also been exploring ways of accelerating them, including assessing the merits of an acquisition of a mobile network operator in the UK.”

If BT acquired O2 it would be a huge step back to the future. BT launched O2, then named Cellnet, in a joint operation with Securicor in 1985, just after BT was privatised. It bought out Securicor in 1999 when Nokias were the best selling handsets - and renamed the business BT Cellnet.

However, by 2001 BT was struggling to survive and was close to being overwhelmed by around £30bn in debts. To reverse the crisis, the group raised about £6bn from its shareholders and hired Sir Christopher Bland, fresh from the helm of the BBC, as chairman. Bland spun off BT Wireless – the mobile division - into a new business called mmO2. The new business relaunched as O2 the following year and was sold to Telefónica in 2005 for £18bn.

The Financial Times has summarised the 2001 demerger as “in hindsight ... one of the worst strategic errors in UK corporate history, given the rapid growth in mobile communications, as it left the former state-owned UK telecoms group without a cellphone business”.

The stock market welcomed the news of a potential mobile deal, with BT’s shares adding 3.71% to 394.1p.

But industry analysts were sceptical that UK consumers would see significant benefits from any tie-up. Charlotte Patrick, a director at technology research company Gartner, said: “There has not been much quad-play in the UK, although it has been popular in other countries. There is a potential for small cost savings for consumers. ”

Despite O2 being sired by the UK’s traditional telecoms giant, industry watchers suggested that BT’s customer list would now more naturally fit with EE’s. Those who use O2’s services are typically younger customers. BT also already has a tie-up with EE.

More on this story

More on this story

  • Wave of merger mania could change the face of UK telecoms industry

  • If BT is throwing £10bn at mobile, the corporate dance has started

  • BT’s still failing to deliver on its promises over fibre optic

  • BT’s cheaper phone and broadband rivals eye transfer market

  • Kipper Williams on BT and O2

  • What sparked the boost to Vodafone’s share price?

  • UK joins world’s fastest mobile internet club with next generation 4G+ rollout

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