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BT agree terms of £12.5bn EE takeover

Out-Law News | 06 Feb 2015 | 10:06 am | 2 min. read

The parent companies of mobile network operator EE will both be issued with equity shares in BT as part of a £12.5 billion deal enabling BT to buy EE.

BT announced that "definitive terms" of the transaction for EE has been agreed with both Deutsche Telekom and Orange. Both businesses will gain a stake in BT as well as cash as part of the deal to transfer ownership of EE to the UK telecoms giant. Deutsche Telekom will have a 12% stake in BT and Orange a 4% stake post-transaction.

BT said the deal, which still requires shareholders' approval, is being scrutinised by competition authorities including the UK's Competition and Markets Authority (CMA).

BT chief executive Gavin Patterson said the deal for EE will serve as a boost to its plans for growth in the mobile market.

"The UK’s leading 4G network will now dovetail with the UK’s biggest fibre network, helping to create the leading converged communications provider in the UK," Patterson said. "Consumers and businesses will benefit from new products and services as well as from increased investment and innovation."

Deutsche Telekom chief executive Tim Höttges said that obtaining a stake in BT would help the two companies collaborate in future.

"The transaction is much more than just the creation of the leading integrated fixed and mobile network operator in Europe's second largest economy," Höttges said. "We will be the largest individual shareholder in BT and are laying the foundations for our two companies to be able to work together in the future. This is another example of the consistent and successful execution of our portfolio optimisation strategy."

When news of the potential deal first emerged in December last year, corporate law expert Andrew Hornigold of Pinsent Masons, the law firm behind Out-Law.com, who specialises in technology mergers and acquisition deals, said BT's closer relationship with Deutsche Telekom and Orange could mark the start of a closer working relationship between the companies in future.

"Deutsche Telekom and Orange each have a significant presence in other European markets, notably Germany and France," Hornigold said at the time. "With EU telecoms regulations set for major reform, and policy makers keen that telecoms providers operate on a more cross-border basis within the trading bloc, this prospective tie-up with EE could just be the start of wider international expansion plans for BT."

In its announcement, BT said it expects to make "substantial" cost savings and reduce future capital expenditure too as a result of the deal. These savings will amount to an annual savings of £360 million by the fourth year after the acquisition is completed, it predicted. However, BT said it expects to spend around £600m in integrating the two businesses to achieve those annual savings.

Among the savings it says can be made through the deal include approximately £70m in commercial savings, which includes streamlining sales and marketing and procurement activities and from "and simplifying digital platforms and the brand portfolio". It also said that about £90m in annual IT costs and a further £80m in network costs can also be delivered.

"Consolidating head office functions, rationalising property and realising scale economies in customer service operations" will also help the combined business to save £120m a year, BT said.

IT contracts expert Clare Murray of Pinsent Masons previously said there are particular challenges in merging different IT systems together, but said that a merger can act as "a positive catalyst for change" for businesses.

"In a merger situation, purchasers will want to understand how the target business supports its business critical systems, the complexity and risk profile of its supply chain, whether the business is involved in IT litigation or other problem contracts. This will help them understand the risks they would be taking on if progressing with a merger and the challenges to be overcome to realise the benefits of such a deal," Murray said.

Competition law expert Guy Lougher of Pinsent Masons said that he expects competition regulators reviewing the BT-EE deal to determine "whether fixed voice, broadband and mobile should be considered as separate markets, given current and future customer practices". He said there would also be "intense scrutiny of whether the transaction would put BT in such a strong position that other, less integrated, competitors could not in practice compete effectively."

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