Bloomberg

London 

BT Group Plc’s negotiations to acquire one of Britain’s two largest wireless operators gained momentum over the weekend, with the owners of O2 and EE jostling with each other to reach a deal with the former telecommunications monopoly, according to people familiar with the matter.

BT, which wants to expand into mobile services, may announce exclusive talks with Telefonica, which controls O2, or Deutsche Telekom and Orange, the shareholders of the venture called EE, as early as later yesterday, said the people, who asked not to be identified because deliberations are private.

While the British firm was leaning toward O2 last week, it has continued negotiations with EE’s owners as it tries to solicit a better price and structure, said the people. To alleviate BT’s concern about EE’s more complicated ownership, Paris-based Orange and Bonn-based Deutsche Telekom offered terms that would see the French exit entirely with the Germans selling only part of their 50% stake, one of the people said.

“There’s a need for consolidation in the UK market and everyone wants to move,” said Stephane Beyazian, an analyst at Raymond James. “BT has some flexibility on price in this case, because there are at least two potential sellers.”

Assuming a valuation of 7 times the targets’ adjusted earnings before interest, taxes, depreciation and amortisation, O2 is worth £9.4bn ($14.8bn) and EE £11bn, according to estimates by Citigroup analysts.

Representatives for London-based BT, Madrid-based Telefonica, Paris-based Orange and Bonn-based Deutsche Telekom declined to comment on the talks.

BT, which said last month it had received expressions of interest from the owners of two UK carriers for a deal, is eyeing wireless targets so it can sell fuller service packages to help boost phone bills and retain customers. BT has become popular because it controls the country’s biggest fibre network.

Without a deal, Telefonica, Orange and Deutsche Telekom would be left lacking a nationwide broadband network to offer bundles of mobile, Internet and TV services in the UK.

Shares of BT rose 0.8% at 8:05am in London, as Telefonica fell 0.3% in Madrid. Orange lost 0.6% in Paris and Deutsche Telekom added 0.2% in Frankfurt.

Billionaire Li Ka-shing’s Hutchison Whampoa is also considering whether to pursue a deal for its UK mobile unit Three, which trails EE, O2 and Vodafone Group by customers, people familiar with the situation have said. If Three decides to make an acquisition, that would mean the “one-buyer situation” won’t persist, Beyazian said.

Deutsche Telekom and Orange have been debating what to do with their four-year-old venture. In January, they agreed to freeze talks over an initial public offering of EE as executives worried about the impact the service-bundling trend would have on the market.

EE has started selling broadband service through a wholesale arrangement with BT, while BT had planned to extend its mobile service — currently available to businesses through a resale agreement with EE — to consumers next year. BT has been expanding its own TV offers, bidding against Rupert Murdoch’s Sky Plc for the most popular soccer matches and buying out ESPN’s channel in the UK last year. That put BT in a stronger position to offer so-called quadruple-play packages.

For Telefonica, a sale of O2 would generate proceeds to repay some of its €45bn ($56bn) in net debt as it tries to maintain its ratings, said Carlos Winzer, an analyst at Moody’s Investors Service, which ranks the company’s debt at Baa2, the second-lowest investment grade.

Telefonica could also use the money to help fund takeovers in the faster growing Brazilian market.

BT’s expansion plan has sparked talks across the UK as other carriers looked for ways to defend their positions. Besides Hutchison, Vodafone is also considering its options, including a combination with Liberty Global Plc, which runs the Virgin Media broadband and TV business in the country, people familiar with the matter have said.