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BT coughs £12.5 billion for EE as fourplay frolics pay off

IT 'rationalisation' key to £360m-a-year savings

BT has agreed terms with the French company Orange and Deutsche Telekom to buy their joint venture EE to form a quad-play superpower.

The £12.5bn deal will be a combination of cash and new BT ordinary shares issued to both Deutsche Telekom and Orange.

Average cost savings of £360m a year over the next four years will include “rationalisation” of call centres, IT and renegotiation of suppliers agreements. Those suppliers will include makers of femtocells, as BT is very keen on rolling out small cells to improve coverage in both homes and businesses.

Gavin Patterson, BT’s chief exec is excited about Fourplay and told analysts (PDF) this morning: “In many ways we’ve been the outlier for the last 15 years,” adding that “for BT this is about truly converged services.”

He went on to say, “It’s not just about converged services, it’s about converged networks.”

The expectation is for the new fourplay firm to be on IP for voice by 2025. However, it doesn’t give EE preferred access to BT Openreach fibre. “Openreach is very tightly regulated,” said Patterson. “There will be no inherent advantage.”

The EE customer base breaks down as 24.5 million direct (as opposed to MVNO) mobile customers and 834,000 fixed broadband customers. With 7.7 million connections it has the largest 4G customer base of any operator in Europe. The biggest MVNO is Virgin, a name Patterson refused to utter. Instead he talked about there being 31 MVNOs, including “one big one” and said he’d spoken to “the big one”. He pointed out that BT is very comfortable being a wholesaler.

BT estimates that the transaction values EE at a multiple of about six times its 2014 EBITDA. The traditional way to break this down is to look at the cost per subscriber. At the end of last year EE had 30.94m connections, which would give a figure of £404 per connection. Yet in this case BT is buying a lot more than the subscriber base – it’s getting the staff, infrastructure and spectrum. It will not, however, attach any value to the brands.

EE has already stopped selling T-Mobile and Orange connections and it is expected that the EE brand will also go, although on a conference call to investors refused to sign the brand’s death warrant immediately saying that BT successfully runs the BT and Plusnet brands side by side, saying: “It is a question for a completion. We will continue to operate the EE brand certainly in the short term; we have been able to run two brands across the business and consumer market”.

The deal gives Deutsche Telekom a 12 per cent shareholding in BT and it will be entitled to appoint one non-executive member of the BT board. Orange will hold a four per cent stake in BT. DT has the right to increase its shareholding to 15 per cent but there are mechanisms in place to protect smaller shareholders.

In line with the usual fourplay dream, BT sees significant advantage in selling its broadband, fixed telephony and pay-TV services to those EE customers who do not currently take a service from BT. The one-time national monopoly also expects to accelerate the sale of converged fixed-mobile services to its existing consumer and business customers and offer new services, using both companies’ product portfolios, skills and networks.

BT expects to generate “revenue synergies” with a total net value of approximately £1.6bn. This will include BT’s plans to offer consumer mobile services, which Patterson described as being “fully on track.” Only a third of BT customers take services from EE. There is an opportunity to consolidate, particularly in houses where there are multiple networks.

It also gives BT 580 stores on the high street. While previous mobile deals have led to companies having two shops next door to each other, BT does not currently have any retail space.

Tony Chanmugam, BT Group finance director, explained that the company has a “strong record in cost transformation”, and that the “synergies are focused within OPEX”. He pointed out that BT is one of the largest advertisers in the UK and said that there will be more in-sourcing and call centres in the UK, and a joint business sales organisation. The integration is expected to cost £600m.

The takeover is subject to approval by the shareholders of BT and merger clearance, in particular from the UK Competition and Markets Authority. It is expected to complete before the end of BT’s 2015/16 financial year. ®

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