After weeks of speculation, we now know that BT Group (LSE: BT-A) (NYSE: BT.US) is hoping to buy the UK’s largest and most technically advanced mobile operator, EE, for £12.5bn.
Quad-play leader?
From a technical and marketing perspective, this looks pretty good. BT will get access to EE’s 25m customers, and will be able to enter the quad-play market, offering mobile, home phone, broadband and television, in a single package.
This model isn’t yet popular in the UK, but I suspect BT’s timing could be right. Customers should welcome the value and simplicity quad play can provide, as well as the ability to enjoy seamless internet access and television services across all of their devices, whether at home or when out.
What about the cost?
The provisional price for the deal is £12.5bn, which is eight times EE’s 2013 adjusted earnings before interest, tax, depreciation and amortisation (EBITDA), and doesn’t seem unreasonable.
BT has already said that the sale would be funded with a mixture of new BT shares and cash. Most of the new shares seem likely to go to EE parents Deutsche Telekom and Orange, which are expected to hold 12% and 4% stakes in BT following completion of the deal.
To fund the cash element of the deal, my calculations suggest BT might have to raise around £6bn of new debt, to add to the firm’s current net debt of £7.4bn.
Is that affordable?
BT has already tried to reassure investors about its debt situation, saying last night that it “is mindful of the importance of maintaining a conservative financial profile“, in order to avoid the risk of higher borrowing costs.
However, EE had net assets of £9.3bn at the end of June 2014, so the addition of these to BT’s balance sheet could offset the impact of any likely new borrowing, assuming the mobile operator’s net assets remain at this level.
Overall, the new debt should be manageable.
Should you buy BT?
In the short term, I think BT’s dividend could come under pressure, due to the extra cost of paying the dividend to new shareholders, while funding the integration of EE into BT’s service offerings.
However, in the medium term, I think that this deal looks attractive, and would expect BT shareholders’ patience to be rewarded with steady growth and rising dividends.
Overall, I rate BT shares as a buy on today’s news.
