(Adds reaction; refiled to add dropped word ‘acquisition’)
By Kate Holton and Paul Sandle
LONDON, Dec 15 (Reuters) - BT has entered exclusive talks with the owners of EE for a potential 12.5 billion-pound ($19.6 billion) acquisition deal to give the former UK state telecoms firm the top position in mobile as well as fixed line broadband services.
BT had been in competing talks with both the Spanish group Telefonica’s rival mobile firm O2 and EE’s owners, Orange and Deutsche Telekom, putting the 168-year-old fixed line firm in a strong position in negotiating for a return to the consumer mobile market after 13 years away.
BT said it now expects further negotiations with EE’s owners to take several weeks under the exclusivity pact to reach a definitive agreement.
If completed, BT will pay for EE with a roughly 50:50 ratio of cash and shares for a combined value of 12.5 billion pounds, although Deutsche Telekom will get a 12 percent stake in BT and the right to appoint one board member while France’s Orange will get more cash and only a 4 percent stake in BT.
Analysts had been valuing EE last month at nearer 11 billion pounds ($17 billion), and 02 at 9.4 billion pounds.
“EE is a good asset, with a good network and good spectrum,” said Macquarie analyst Mark Murphy, who described the price as rational with a higher cash element than expected.
“You could see that as a sign that BT is pretty confident this is going to be a really important positive deal for them, and they are happy to do it in cash and the market is probably going to be happy to help them raise additional equity, which looks likely.”
The French and German companies each owned 50 percent of EE, after a merger of their Orange and T-Mobile units in 2010.
The business, which had 24.5 million direct customers, stole a march on its rivals when the regulator allowed it to re-use existing airwaves to launch 4G services nearly a year ahead of its competitors.
The strong promotion of 4G has helped it grow strongly and EE generated adjusted earnings before interest, tax, depreciation and amortisation of 1.6 billion pounds in the year to the end of June.
Combining the country’s biggest fixed-line provider and mobile operator could face higher regulatory hurdles than a deal for Telefonica’s O2.
However, Deutsche Telekom’s chief executive Tim Hoettges said he thought the regulatory risks were low.
“If no significant obstacles arise in the due diligence process, it will pass quickly,” Hoettges told Reuters.
Analysts and bankers have said BT’s choice was likely to provoke further moves towards industry consolidation in Britain, where the market is split between four mobile network operators and four separately owned fixed line broadband providers.
Sources have sadtold Reuters that Hutchison, the owner of Britain’s smallest mobile network Three, has been waiting in the wings to buy whichever group BT spurns.
A deal with Telefonica would have returned O2 to its original owner, as it was demerged from a heavily indebted BT via a share flotation in 2001 and subsequently bought by Telefonica in early 2006.
BT said that by buying the country’s biggest superfast mobile network it would accelerate its plans to give retail customers seamless access to the Internet whether via fibre broadband in buildings or with wi-fi hotspots and 4G mobile services.
It will also enable BT to cut costs through the rationalisation of networks and operations and to sell broadband to EE customers that it does not already serve.
“The period of exclusivity will last several weeks allowing BT to complete its due diligence and for negotiations on a definitive agreement to be concluded,” it said. ($1 = 0.6395 pounds) (Additional reporting by Arno Schuetze in Frankfurt, Julien Toyer in Madrid and Sophie Sassard and Pamela Barbaglia in London; Editing by Greg Mahlich)