What Does O2 Sale Mean For BT Group plc And Vodafone Group plc?

Shares in both BT Group (LSE: BT.A) (NYSE: BT.US) and Vodafone Group (LSE: VOD) (NASDAQ: VOD.US) rose by more than 2% when markets opened this morning, following news that mobile operator O2 is to be sold for £10bn to Hutchison Whampoa, the Hong Kong-based owners of UK operator Three.

If the deal goes ahead, it will mean that O2-Three is the largest mobile operator in the UK, pushing EE into second place and Vodafone into third.

So why do investors think this is good news for Vodafone and BT Group?

Competition down, prices up

At the moment, the UK mobile market has four competing network operators. If the O2–Three deal goes ahead, then that number will be reduced to three, reducing the level of competition between operators.

The outcome of this is almost certain to be higher prices for customers. This will be bad news for most of us, but good news for cash-strapped Vodafone and for BT, which is in the process of negotiating a £12.5bn deal to buy EE (formed in by the merger of Orange and T-Mobile in 2010).

BT may steam ahead

If both mergers go ahead, the resulting landscape could look very attractive for BT shareholders. BT would own the second-largest mobile operator in the UK, along with the largest fixed-line and broadband network in the UK.

This, coupled with the firm’s growing television operation, would put BT in a strong position to dominate the so-called quad play market — telephone, broadband, mobile and television.

Of course, regulator OFCOM may be uncomfortable about allowing BT to take such a dominant position in the market. However, to me, the fact that both BT and Hutchison have agreed deals of this size suggests that both firms’ lawyers are confident the regulator will allow them to proceed.

What about Vodafone?

The obvious positive for Vodafone is the potential for price rises, but leaving that aside the picture isn’t quite so rosy.

Vodafone would become the UK’s smallest physical network operator. Although it has recently bought cable networks in Germany and Spain, its fixed-line assets are weaker in the UK and it lacks fixed-line telephone, broadband or television offerings. It also lacks the low-cost credentials of Three.

As a result, I wouldn’t be surprised if a third deal, involving Vodafone and perhaps Virgin Media or Talk Talk, follows today’s news.

However, despite this positive outlook, I think that BT and Vodafone already look fully priced.

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Roland Head owns shares in Vodafone. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.