BRITISH TELECOM'S ALL-IN ON 'QUAD PLAY' SHAKES UP ENTIRE UK TELECOMS INDUSTRY WITH MORE M&AS TO COME

THERE CAN BE LITTLE DOUBT ABOUT HOW VALUABLE BRITISH TELECOM (BT) SEES QUAD PLAY, WHERE TELECOMS OFFER TV, BROADBAND PLUS LANDLINE AND MOBILE PHONES IN A BUNDLE. THE COMPANY HAS ESSENTIALLY JUST FIRED THE STARTING GUN ON WHAT IS LIKELY TO BE A VERY BUSY 2015 FOR THE UK TELECOMS INDUSTRY WHERE WE CAN EXPECT A SERIES OF M&AS THROUGHOUT THE YEAR.

By Jakob Sand, Partner, leader of Global TMT M&A

That is a conclusion drawn from looking at the figures of BT’s recently announced acquisition of Britain’s largest mobile operator EE, which is currently owned by Deutsche Telecom and Orange. The deal is worth a staggering £12.5 billion – more than three times the amount that BT has invested through the last couple of years on offering superfast broadband and sports broadcasting, including TV rights for parts of the Premier League, to its customers. While the deal is still being finalised by a group of lawyers, who probably have not had much more than a nap since before Christmas, the result for BT is that it with one swoop becomes the UK’s biggest mobile network.“This is a combination of Britain’s largest supplier of fixed telephone lines with Britain’s dominant mobile network. BT appears to be positioning itself into the incipient space of services. BT expects significant synergies in the deal and believes the transaction is the start of the anticipated convergence of fixed line and mobile internet access. We expect more consolidation in the UK’s telecom sector,” Tom Mannion, Director - Valuation & Business Analytics, BDO USA, says. It leaves the other UK telecoms scrambling to find a way to offer quad play, and consolidate their positions in the mobile market, where there, according to analysts, will be fewer companies left standing at the end of 2015 than at the beginning.

Crowded quad-play forecast

According to UK analysts, the deal will probably mean that BT will be forced to sell off some radio spectrum, as the combined spectrum of BT and EE exceeds the UK airwaves share cap. Overall, the view is that the deal prepares BT for the future telecoms market. “From a commercial perspective, the firms are largely complimentary as the UK market moves towards quad-play,” Matt Howett and James Robinson, Analysts at the telecoms research company Ovum said in a set of comments about the deal. Quad-play holds advantages for both customers and companies. For customers, combining four services into one package saves time and money. Companies offering quad-play gain massive cross-selling opportunities and reduce the amount of time and administration associated with servicing current – and winning new customers. Quad-play has seen a slower uptake in the UK than in neighbouring countries. However, companies like BSkyB, BT, TalkTalk and Vodafone all look like they are moving towards becoming quad-play suppliers. This leads to a crowded market, and there could be significant advantages associated with being a first mover. It should be noted that Virgin Media has offered quad-play for some time, but has been severely restricted by availability-issues. This means that BT will in essence be the first major telecoms in the UK with a quad-play offering.

Consolidating needs wiring According to analysis by Rethink Research, the deal between BT and EE is indicative of a current need for telecoms across Europe to consolidate their positions in specific markets.

One big reason for this is the capital expenditure (Capex) associated with installing 4G (LTE Advanced) networks. “Let’s consider for a second a telco such as Germany’s Deutsche Telekom, which owns T-Mobile assets all over Europe. To install LTE and then rapidly after this to upgrade it to LTE Advanced and to take its installed handset base to each of these standards, and perhaps to add carrier aggregation, is a vast Capex burden. If you also have to fight against Wi-Fi by installing a multitude of small cells, with their numerous backhaul points, it makes it an even bigger capex burden,” Rethink Research writes. As I previously talked about with Christian Gotz, cable infrastructure is very attractive to European telecoms, and part of the reason is that it lets you leapfrog some of problems that can be associated with the point mentioned above. Acquiring the infrastructure and turning it into a subsidiary means that you are dealing with one of your own companies when it comes to using part of the infrastructure needed to deploy a 4G network. “[…]a subsidiary that can provide you with a 100 Mbps vectored VDSL or a 1 Gbps G.Fast or fibre line, wherever you want it in your footprint. If it also comes with a spattering of existing Wi-Fi resource, all the better,” Rethink Research explains. There are mainly two ways of combating the increased capex associated with upgrading to 4G. One is selling off operations in one of more of the markets where you are active to another operator and thereby in essence getting rid of the problem. The other is investing in a local fixed-line owner, which you can both use yourself and / or lease to other mobile network operators. It also enables you to offer quad-play.

M&As waiting to happen

In many European countries, there are two businesses that control fixed lines – usually one larger than the other. However, many of those countries have at least three companies that control cellular. This leads to a situation where there will be an increased pressure to merge the two smallest cellular companies, which will then try to buy the smaller fixed line company. All the new entities will be perfectly placed to offer quad-play. “Where that is not possible, the fixed line player may try to buy the cellco and at some point, if valuations continue to go the way they are going, this will become possible. […] it makes sense for every cellco that is in say six countries as a pure cellco with only converged operation in its home country, to sell off three cellcos where it is least likely to find the right fixed line acquisition and buy two more fixed line players. In other words - move from five pure cellcos plus one converged, to three converged players,” Rethink Research argues. In the UK, this looks likely to happen for various companies during 2015. BSkyB recently announced that it will sell off 80 percent of its stake in its online gambling business, thereby lading its coffers. It has also reached out to Vodafone , EE and O2 about the possibility of using their networks to offer mobile services.Vodafone, on the other hand, announced in November of last year that it will launch broadband and TV in the UK during 2015. This comes on the back of its acquisition of Cable & Wireless. Other UK telecoms players like TalkTalk, O2 and 3 all find themselves at a disadvantage after the BT deal and I believe that will be looking for ways to consolidate their positions through M&As. If they do not, they will very likely find themselves the losers of a very high stakes version of musical chairs.