Moody's Positive on Potential O2/EE Acquisition by BT Group plc (BT)

BT Group Plc's (rated at British Telecommunications Plc, Baa2 positive) (NYSE: BT) potential acquisition of mobile operators O2 or EE Limited (Baa2 stable) would likely accelerate the convergence trend in the UK fixed-mobile market, thereby aligning it with the rest of Europe, says Moody's Investors Service in a Special Comment published today.

Moody's report, entitled "BT's Potential Acquisition of O2 or EE Will Force Further Consolidation and Convergence in UK Market", is available on www.moodys.com.

"The UK telecoms market currently lags other European markets in its preference for converged products, with BT the only European incumbent lacking a mobile network operator," says Ivan Palacios, a Moody's Vice President -- Senior Credit Officer and author of the report. "Mobile-centric players, such as EE, O2, Vodafone and H3G, face limited strategic options for growth in a converged market and the deal would likely encourage them to merge -- either with each other or with the remaining fixed-centric operators."

In its report, Moody's notes that BT's combination with a mobile operator would strengthen its competitive position in the UK market as the largest integrated player. BT would benefit from material synergies and network efficiencies as well as a first-mover advantage. Moody's expects that any potential deal will be funded in a balanced and prudent manner such that its credit metrics are not materially weakened.

Moody's also notes that, compared to O2, EE has a larger subscriber base, greater 4G coverage and would also bring back the backhaul network, which is currently under contract with Virgin Media. However, O2 has stronger margins and its spectrum portfolio is more complementary to that of BT, given that O2 owns 42% of the total spectrum below 1 GHz, which is the most efficient for coverage.

On 24 November, BT Group confirmed it was in preliminary talks about a potential acquisition of O2, a UK mobile operator owned by Telefonica S.A. (Baa2 negative). On 26 November, Deutsche Telekom AG (Baa1 stable) and Orange (Baa1 stable) confirmed that they have also held talks with BT to sell EE, their UK mobile joint-venture. All discussions are at a highly preliminary stage and there can be no certainty that any transaction will occur.

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