Challenges and opportunities ahead for BT if EE takeover plans progress, say experts

Out-Law News | 16 Dec 2014 | 5:15 pm | 3 min. read

Legal experts have identified a range of challenges and opportunities ahead for UK telecoms giant BT if it progresses with a planned £12.5 billion takeover of the mobile network operator EE.

BT announced on Monday that it had opened talks with the parent companies of EE over a possible acquisition of the business under the terms of an "exclusivity agreement" with Deutsche Telekom and Orange. BT said a tie-up with EE would enable it "to accelerate its existing mobility strategy" and compliment its existing fixed line broadband and Wi-Fi offerings with "the UK's most advanced 4G network".

Having EE's 4G network in-house would provide BT with "greater control in terms of future investment and product innovation", it said. EE provides mobile services to 24.5 million customers.

Under the terms of the planned deal, both Deutsche Telekom and Orange who currently own EE would own a minority stake in BT. Deutsche Telekom would also be entitled to appoint one member of BT's board of directors.

Corporate law expert Andrew Hornigold of Pinsent Masons, the law firm behind Out-Law.com, who specialises in technology mergers and acquisition deals, said: "The fact that Deutsche Telekom and Orange will have an interest in BT and, potentially, a seat on BT's board if a takeover deal is finalised suggests that this acquisition could mark just 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. 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," he said.

Hornigold said, though, that a merger of BT with EE would have a number of challenges. In its statement, BT said that it expects a merger with EE would deliver cost-saving opportunities, including through the rationalisation of network and IT systems, as well as through "back-office consolidation and savings on procurement, marketing and sales costs".

"It could take a long time for the two businesses to be integrated properly, and certainly for the potential rationalisation benefits of the deal to be realised," he said.

IT contracts expert Clare Murray of Pinsent Masons 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 identifying new strategic objectives and realigning their IT portfolio to support them.

"It is notoriously difficult to integrate different IT systems, software and support services quickly after a merger deal," Murray said. "There are, indeed, recent examples where businesses have withdrawn from merger talks after identifying complexities in integrating their IT systems with other businesses. It is important for purchasers to carry out effective due diligence before progressing with a merger."

"New digital technologies such as big data solutions and cloud computing are already disrupting traditional markets so it is important for any established businesses to get a handle on their current operating model. A merger can act as a useful catalyst that prompts businesses to gain more control, understanding and oversight of all the IT systems and the underlying contracts with suppliers that underpin them and to determine what change is required," she said.

"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 BT would have to convince competition regulators of the merits of any tie-up with EE too.

“The transaction will obviously need prior merger approval, and will be scrutinised very closely by the competition authorities," Lougher said. "During that review process, the authorities will consider whether fixed voice, broadband and mobile should be considered as separate markets, given current and future customer practices. There will 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."

"For its part, BT will be emphasising the likely customer benefits arising from the transaction, and the number and range of competitors it will continue to face, especially in mobile and broadband. Ultimately, if BT is unable to win the competition arguments, it will need to identify structural or behavioural solutions to try and save the deal, and in that scenario the authorities usually have a strong preference for structural solutions," he said.

BT, which has in recent years expanded into the pay-TV and sports rights markets, said that it has a backup plan to improve its profile in the mobile market should its EE takeover talks fail.

"While continuing these exclusive discussions, BT will progress its own plans for providing enhanced fixed-mobile converged services for businesses and consumers, in line with previous announcements," it said. "It remains confident of delivering on these plans should a transaction not take place."

Before announcing its talks with EE, BT had confirmed press reports that it was considering making an offer for O2, the mobile network operator owned by Telefónica which it had previously owned before spinning off O2 division from its business in 2001.