It’s been common knowledge that BT Group (LSE: BT-A) (NYSE: BT.US) has been planning a move back into the mobile business for some time. The only question was whether the target would be Telefonica‘s O2 (originally spun off by BT in 2002) or EE, owned jointly by Deutsche Telekom of Germany and France’s Orange.
Now we know the target is EE, as BT has confirmed it is in exclusive talks with a view to buying the group for £12.5bn.
Market leader
The deal would get BT around 24.5 million mobile subscribers and, crucially, a headstart as the UK’s leading 4G operator — and BT already owns a chunk of 4G spectrum, acquired in the 2013 auctions. As such, going for EE seems like a better deal for shareholders, even though O2 would most likely be cheaper.
Investors managed to contain their excitement, though, with just an 8p (2%) rise in the share price to 406p by the time of writing.
A takeover would also give BT a kickstart in competition with rival Vodafone (LSE: VOD) (NASDAQ: VOD.US), which is in the relatively early stages of building its own 4G network as it struggles with declining service revenues.
At interim time, Vodafone revealed that service revenues were still dropping overall, but at a slower pace — we heard of a 1.5% fall in the second quarter compared to a 4.2% fall in Q1. But it’s the key developed markets of Europe that are hurting the most, with Germany down 3.4%, Italy down 9.7%, Spain down 9.3% and the UK down 3%.
4G coverage rising
Vodafone’s European 4G network coverage had reached 59%, which is not bad going, but the total number of 4G customers at just 10.5 million shows how wide open the market still is.
By contrast, EE has previously said it plans to reach 90% UK coverage by the end of 2014, so a tie-up with BT would put Vodafone on the back foot, at least in the UK.
For BT, the acquisition of EE would also extend its fingers to four potentially lucrative pies — fixed line, mobile, broadband and TV, but that could introduce regulatory issues that rivals like Vodafone are likely to push.
Which to buy?
The fundamental valuations of the two are surprisingly different. With a P/E of only around 13 and dividend yields of 3.2% and 3.6% forecast for this year and next, BT looks a lot cheaper than Vodafone with its P/E of 34 — Vodafone does pay higher dividends, but they’re nowhere near covered by forecast earnings.
On the whole, if you think there are profits to be had from 4G investments, BT now looks the better bet to me.