BT gets set to shake up the telecoms market one more time Little more than a decade after BT spun off its mobile phone business, it is thinking about buying it back from its Spanish owner. The former state monopoly demerged the O2 business - then called Cellnet - in 2001 as part of a large scale restructuring of the company, which was crippled by debt following an ill-fated expansion. But after being approached by Telefónica, which bought O2 in 2005 for £17.7bn, BT is plotting its return to the mobile sector from a position of strength. It boasts a much more robust balance sheet and a management team determined to build a business that can compete in the new world of bundled offerings, in which telecoms companies are battling to lure customers with a mix of mobile, home broadband and television content packages. Telefónica's deals driven by three main goals On Monday, BT also confirmed that it had been approached by shareholders in two UK mobile operators, of which one is O2, about a possible transaction in which BT would acquire a UK mobile business. The owners of EE have also spoken to BT. If BT makes a deal with either company, it could spark a round of fresh dealmaking in the sector as rivals seek to build similarly strong combinations of fixed, mobile and TV businesses. A shift towards bundled offerings has already begun, with the sector at least partly nudged into this new world by BT's 2012 decision to spend £2bn to buy sports rights, such as Premier League football. Both EE and Vodafone have announced plans for their own broadband and TV services in the UK in recent months. Last week, TalkTalk moved to strengthen its mobile business under an agreement with O2. BSkyB could be forced to consider similar deals to join into the mobile market if a strengthened BT begins to take customers. David Wright, analyst at BOA Merrill Lynch, says that the proposed deals reflect an evolving UK market. For BT, they would accelerate the timing and the scale of its relaunch back into mobile. For Telefónica, which would want to maintain an interest in the O2 business, it would help deal with its own lack of fixed line infrastructure. "Such a deal could deliver material cost, capex and cross-sell revenue synergies based on recent fixed line/mobile precedent transactions," he said in a note. Of the two businesses, O2 would be an easier transaction given that the valuation is smaller and it is owned by a single company. The deal would also be made easier by the strength of BT's share price given that the deal is expected to be mostly funded using its stock. There is no detail about how the acquisition could be structured although BOA Merrill Lynch estimated that a deal to swap a fifth of BT's shares for O2 would mean a valuation of about £7.8bn. "This would be consistent with our view that BT should have the upper hand in negotiations given that it is a potential attacker in UK mobile . . . while Telefónica is strategically compromised due to a lack of fixed infrastructure," Mr Wright said. The deal could also make life easier for BT. Buying either EE or O2 would help it create a telecoms company capable of dominating rivals such as Sky and Vodafone. Buying a mobile-only rival would also give it a considerable head start as it launches its own service. Analysts at Deutsche Bank agreed that the deal made sense for Telefónica - both to reduce its high debts and "avoid value destruction as the hitherto relatively benign UK market rushes headlong into convergence competition." They said that a stake in BT "could prove appealing" to "maintain influence beyond its shrinking boundaries." Deutsche Bank said that on a sector multiple of 6.5 x earnings, O2 is worth close to £9bn which would mean that Telefónica would end up owning about 22 per cent of BT in an all-share deal. "Synergies on a possible merger between O2 with BT would be substantial," it added. Whichever deal it chooses to pursue, it will probably need to decide before Christmas given the need to make progress on its own plans if it decides to go it alone. Either way, BT is going to continue to shake up the once sleepy UK telecoms sector. For Telefónica, a deal to sell its O2 mobile operation in the UK would be the latest move in a broader reshuffle that has seen the Spanish group buy and sell assets on two continents, writes Tobias Buck in Madrid. Analysts point out that a flurry of recent transactions has been driven by three overarching goals: to keep the group's debt load under control; to concentrate on the biggest and most lucrative markets; and to better position the company to become an all-in-one mobile-to-broadband operator. Telefónica have put more capital into Germany to make their business there bigger and more profitable. They are going through much the same process in Brazil," said Simon Weeden, analyst at Citigroup. But that leaves them with a relatively indebted balance sheet so lightening up on assets in markets where profitability is not so high makes sense. A deal with BT would also follow the broader industry pattern of "convergence" of fixed-line and mobile services. Telecoms executives believe that users increasingly want to deal with a single provider for everything from broadband services to mobile telephony. Vodafone, for example, has already announced plans to launch fixed-line broadband and television services in the UK from next year. "Having effectively bet against convergence in the UK, Telefónica now finds the market belatedly accelerating towards it," analysts at Jefferies wrote in a note on Monday, adding that "it would be wise for Telefónica to make its move before O2 UK becomes a "problem asset."" José María Álvarez-Pallete, chief operating officer, told a conference in Barcelona last week that convergence was at the heart of the group's considerations in Britain. "The question is if the UK becomes convergent in the future," he said. If the UK is to become a convergent market then we would evaluate all options. Telefónica executives regard the UK as a critical market for the group's future, suggesting there is no plan to exit the country altogether. However, swapping O2 for a stake in BT would give the Spanish group a liquid holding that it could sell down should the need arise - either to fund future acquisitions or to further reduce debt. That would fit the recent pattern at Telefónica, which has sold operations in peripheral markets such as Ireland and the Czech Republic while expanding in Germany and Brazil. Net debt stood at €41bn at the end of September, but that was before the acquisition of Germany's E-Plus. Telefónica has promised investors to keep net debt below €43bn.