The battle for customers is heating up in the telecoms world as rumours suggest that Talktalk Telecom (LSE: TALK) and SKY (LSE: SKY) are now fighting over mobile network provider, O2 in order to compete with BT (LSE: BT.A) more effectively.
BT’s £12.5bn deal to buy EE, the UK’s largest mobile network group, has sent a shock wave throughout the UK telecoms sector.
This deal will mean that BT is one of the few providers that is able to offer customers quad-play media bundles on a national scale. What’s more, the size of the BT empire allows the company to offer deals that peers cannot, putting smaller providers like Talktalk and Sky on the back foot.
Debating a tie-up
O2 is currently owned by Spain’s Telefonica, which is looking to offload the mobile provider in order to pay down debt and there are plenty of bidders. Sky and Talktalk are both interested in bidding for O2, with Three — owned by China’s Hutchison Whampoa — also considering a £9bn takeover. Additionally, Vodafone’s rival and owner of Virgin Media, Liberty Media has shown interest.
Talktalk already has its foot in the door here, as the company inked a 4G agreement with Telefónica UK and O2 last year. The deal allowed Talktalk to roll out a ‘virtual network’ — effectively a rebranded version of the O2 national network. However, over time, Talktalk plans to augment the network by distributing new home routers to its 4.2m broadband customers, which would also function as small mobile masts. Effectively, this would enable Talktalk to create its own small slice of 4G radio spectrum, reducing payments to O2.
Unfortunately, despite this strategy advantage over its peers, after acquiring Tesco’s Blinkbox service, it’s unlikely that Talktalk would be able to stretch itself enough to fund the acquisition of O2.
And the same can be said for Sky, which recently consolidated its European operations by spending £6.9bn to acquire European sister companies, Sky Italia and Sky Deutschland.
After this deal the company’s balance sheet is looking stretched, and an upcoming fight with BT for the rights to televise the English Premier League could become a multi-billion pound battle. So, if Sky does decide to make a move for O2, City analysts believe that the company will have to undertake a rights issue to raise additional cash.
Still, it seems as if the group is set on becoming a major player in the mobile market. Indeed, at the beginning of December last year the company hired Lazard, the investment bank, to help it assess potential opportunities in the UK telecoms market.
Increasing competition
So, what does all this deal making mean for shareholders?
Well, as companies like BT and Sky start to offer quad-play bundles, at low prices, it’s reasonable to assume that profit margins will shrink. Increasing competition across the telecommunications sector will force companies to increase their marketing spend, which could be bad news, as profits will fall.
Overall, consolidation could be good news for customers but bad news for shareholders.
