BT to buy O2 or EE

BT Group could speed up its return to the mobile market after confirming it is in talks to buy back either O2 - the business it spun off in 2002 and was then snapped up by Telefónica for £18 billion three years later - or another network operator, rumoured to be EE. Either deal would be a £10 billion blockbuster.

Spanish newspaper El Confidencial reports that Telefónica and BT are trying to create a strategic alliance, which would include the sale of O2 UK to BT, and in which the Spanish firm would have a 20% stake.

"We have received expressions of interest from shareholders in two UK mobile network operators, of which one is O2, about a possible transaction in which BT would acquire their UK mobile business," admitted BT Monday. "All discussions are at a highly preliminary stage and there can be no certainty that any transaction will occur."

Given that the UK has lagged other European markets in terms of convergent strategies, this potential deal should come as no surprise. And with BT already slated to get back into the fiercely competitive mobile market, Telefónica’s position in the UK could suffer anyway.

"In that sense and theoretically we believe an association between Telefónica and BT in the UK could make sense, although naturally dependent on any terms to be achieved," says broker Espirito Santo.

"We note though that in the UK market there are 3 major mobile only operators - Vodafone, EE and O2 UK - therefore several players could be looking for the same escape strategy which ultimately limits the bargaining power of such operators, especially in light of the launch of BT's mobile operations."

BT published better-than-expected half-year results last month, and the shares still appear inexpensive.

Largely range-bound for the past 12 months, a forward price/earnings (P/E) ratio of less than 13 is a discount to both BSkyB and the sector.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.