BT confirms discussions with Telefónica to acquire O2 UK

UK telco giant BT has confirmed it is in discussions to acquire O2, following reports that the CEO of Telefónica has indicated he is open to some kind of strategic alliance with BT in the UK, which could include selling off O2 UK in return for a stake in BT.

Apparently CEO César Alierta is getting twitchy about US tech giants taking over in Europe, and is framing his strategic rethink in this context. One report reckons Telefonica could flog O2 – currently just behind first-placed EE in terms of UK subscribers – to BT for a 20% stake in the former state monopoly.

While the piece published in Spanish periodical El Confidencial is speculative, it is consistent with other rumours coming out of Telefónica that, if the UK market continues to consolidate in a multiplay direction, with a few players all offering fixed, mobile, TV and content, some kind of major strategic rethink might be called for.

“There is nothing concrete yet, we are alert to movements developing in the UK,” anonymous Telefónica sources are quoted as saying in the piece. It also claims Alierta recently said: “The USA does not want Europe to have internet leaders,” possibly in the light of similar consolidation trends in France.

BT offered the following statement on the matter: “We continue to develop our own plans for providing enhanced mobile services to business and consumer customers, in line with our previous announcements. We remain confident of delivering on these plans and have also been exploring ways of accelerating them, including assessing the merits of an acquisition of a mobile network operator in the UK.

“We have received expressions of interest from shareholders in two UK mobile network operators, of which one is O2, about a possible transaction in which BT would acquire their UK mobile business. All discussions are at a highly preliminary stage and there can be no certainty that any transaction will occur.”

In a statement to the Spanish stock market, Telefónica said: “In relation to recent press speculations regarding potential transactions that could involve its UK subsidiary, Telefónica states that it regularly analyses the evolution of the markets in which it operates, together with the different strategic options available to (i) create value for its shareholders and (ii) reinforce its financial position. In this context, Telefónica informs that although conversations with British Telecom are taking place, those are at a highly preliminary stage and there can be no certainty that any transaction may occur with such company.”

Michael Bishop, an analyst at RBC Capital Markets, had this to say on the matter in a research note: “BT has acknowledged it has received expression of interest from shareholders in two UK mobile operators, of which one is O2, about the possible sale of their UK mobile assets to BT. BT is clearly highlighting that discussions are at a highly preliminary stage and there is no certainty a transaction will occur but we believe BT is in a strong position.”

The other operator BT may be in negotiations with seems likely to be EE, according to an even more sketchy report by Reuters. This is consistent with the assertion in the El Confidencial piece, suggesting that possible talks between BT and EE have complicated the Telefónica negotiations. This could all be a false alarm, but if there is no smoke without fire it would seem BT is positioning itself for a major multiplay move in the UK. BT already has a dominant position in fixed line infrastructure and has invested significantly in content – especially sport – and bought a chunk of 2.6 GHz 4G spectrum in the last UK spectrum auctions.

While BT already has an MVNO arrangement with EE, having moved across from Vodafone a year ago, it seems to have plenty of spare cash and would have a stronger multiplay proposition with its own network. BT has already sewn-up the UK rights for European football and looks set to really shake up the UK telco sector. How companies potentially threatened by this move, such as Vodafone, Sky and Virgin will respond should be fascinating.