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BT faces some harsh historical lessons after EE takeover
C
ommunications industry executives were grooving at the final of The X Factor just before Christmas, even as telecoms group BT finalised a £12.5bn takeover of mobile operator EE. Singer Ben Haenow triumphed at the televised pop talent show and risked a winner’s curse. Talented losers — this year it was Fleur East, Walthamstow’s answer to Beyoncé — often do better subsequently.
That was a takeaway for executives as they headed to the afterparty, muttering that Mr Haenow might soon be referred to as “Ben Backthen”. For them, short-term victory in value-destroying auctions could presage long-term defeat.
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The lesson is particularly relevant for BT, the country’s dominant fixed-line telecoms group. Its agreement to purchase EE, which is owned by Deutsche Telekom and France’s Orange, was confirmed the following day. The agreement is cited as proof that consolidation is afoot in the UK’s fragmented telecoms industry and its hinterland. One purported driver is the necessity for companies to offer customers a “quadplay” service — fixed lines, TV, internet broadband and mobile telephony in one package.
Gavin Patterson, the BT chief executive whose Byronic good looks excite some interviewers more than his managerial credentials, has taken the former state monopoly into TV with expensive purchases of football rights. Buying EE ticks the fourth box on his quadplay shopping list.
The price in cash and shares is more than £1bn ahead of initial guesstimates. Deutsche Bank termed as “hefty” a 7.9 times multiple of trailing earnings before tax and other deductions. Claims that Mr Patterson kept a lid on EE’s price by discussing an alternative bid for O2, another UK mobile operator, thus appear exaggerated.
The idea that wider consolidation is justified by technological convergence is also suspect. James Barford of Enders Analysis, a media consultancy, says: “There is not a lot of evidence of consumer demand for quadplay, or even for fixed-line telephony and mobile together. So far, successful offers have been driven by price discounts.”
A cynic might therefore define quadplay not by its technologies, but as a four-way scrimmage of chief executives, bankers, investors and regulators. The danger is that the fight becomes such fun that some participants no longer care about the final score.
Consolidation is still an alluring prospect for big telecoms groups such as BT and Vodafone, the big UK-based mobile operator. This is partly because their core businesses are stagnating. Underlying sales and profits have had little upward momentum in recent years. Quadplay-driven consolidation offers a chance to make cost savings while improving pricing, hopefully in a way that will not alarm competition watchdogs.
Perennial drivers of consolidation that never appear in presentations to investors are managerial ambition and M&A marketing by bankers. Members of the latter group are gleefully imagining scenarios that might follow in the wake of BT’s purchase of EE. They suggest Vodafone could merge with Liberty Global, the US group that bought UK broadband company Virgin Media for $23.3bn. They also propose that Telefónica of Spain, which owns 02, could combine it with TalkTalk. This value-focused broadband and TV group sponsors the X Factor and is helmed by former Tesco executive Dido Harding.
Other outcomes could include bids from telecoms or cable groups for terrestrial broadcaster ITV, which screens the talent show, and Sky, a rival that distributes programmes by satellite. The value of these businesses lies in such content as ITV’s costume drama Downton Abbey. An external offer for Sky would be complicated by News Corp’s 39 per cent stake, however. The specifics of consolidation can only be guessed at in the UK, as in the rest of the world. The character of the process is predictable. Acquirers would justify prices paid with historic comparisons, or, if these are unsatisfactory, with projections of earnings and cost cuts. Equity analysts would mostly endorse such rationales. But the main transfer of value would be from shareholders in bidding companies to vendors of assets.
It is beyond cliché to observe that those who do not learn from history are condemned to repeat it. That does not stop the axiom from being true. Mr Barford says: “There is always scope to overpay when people are taking big bets on the future.” In telecoms and related businesses, this looks like becoming a habit.
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