By making a move to own the UK’s biggest mobile operator, BT has signalled its quad-play ambitions in a deal that would create the country’s largest provider of fixed-line and mobile services.
Acquiring EE will cost approximately £12.5 billion in cash and shares, with EE’s two owners – Deutsche Telekom and Orange – set to receive 12% and 4% worth of shares in BT respectively.
The deal surprised market-watchers, who had expected it to pick the cheaper O2 network – valued at £9-10 billion – after it emerged in late November that
BT was also in preliminary talks with Telefónica. While EE requires a larger investment, BT claims it offers greater synergies, mainly through “network and IT rationalisation, back-office consolidation and savings on procurement, marketing and sales costs”.
More to the point, it would land BT access to the UK’s most advanced 4G network and 28 million subscribers, reasserting its dominance in the market.
The acquisition of EE could therefore raise a number of regulatory concerns. Firstly, if the deal comes to fruition, BT and EE may have to relinquish some of their 4G spectrum, predicts Matthew Howett, analyst at Ovum.
Both companies acquired spectrum in the 2.6GHz frequency band at the UK’s 4G auction, in which a total of 250MHz of spectrum was awarded in two separate bands. In comparison, Hutchison and O2 received the lower frequency of 800MHz. This could lead regulator Ofcom to redistribute spectrum, particularly if rumours that Hutchison Whampoa will make a bid for O2 materialise. BT’s move for EE could also reignite regulatory concerns regarding BT’s wholesale activities and its control over Openreach, the nation’s fibre-optic broadband infrastructure.
Mobile operators in the UK use BT fibre and legacy copper lines for backhaul, although there are competitive services on the market from the likes of Virgin.
At the same time, O2’s rivals Vodafone, Three and TalkTalk all buy wholesale access from Openreach, which they then resell to retail customers.
O2’s rivals are likely to ask for a guarantee that BT’s wholesale products will continue to be offered on a non-discriminatory basis. “One of two things could happen,” says Howett. “Either BT Wholesale moves into the Openreach group – those products will then fall under the non-discrimination clause – or it completely spins out its access division.”
Pressure has already been placed on Ofcom to ensure greater separation between BT and its infrastructure arm Openreach. In fact, TalkTalk, Vodafone and Three have all at one point or another expressed frustration at the Openreach network. Despite calls for BT and Openreach to be split, Howett believes that would be “a very drastic move, and not something that you can do in a matter of months, or even a year”.
In addition, Ofcom is expected in early January to announce details of a “margin squeeze” test to check whether rivals which rely on access to its network infrastructure to offer superfast broadband are being charged a fair price by BT. Failing that, Ofcom will intervene and regulate pricing. Initial assessment conducted by Ofcom last year have indicated that BT is performing to the required standard.
A third area of concern for regulators could be if the EE acquisition prompts Hutchison Three into acquiring the debt-laden O2. This would lead to a reduction in the number of UK mobile operators, which Ofcom has fought tirelessly to prevent.
Further consolidation seems likely, not only in the UK but across the wider European region. “There is a belief that generally in Europe, we are probably going to see more consolidation,” says Howett. “Also, Ofcom is going through changes. They have a new CEO. They may have different ideas. [This acquisition] has come at a difficult time to say conclusively what could happen.”
If consolidation was to occur on such a scale, the likes of TalkTalk and Sky would find themselves in a vulnerable position. “From the fixed-line perspective, Sky and TalkTalk may also be marginalised if quad-play proves successful,” he says.
The UK market appears destined for major transformation in 2015.
