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BT Group plc Eyes Up O2 In Bid To Re-Enter UK Mobile Market

Today BT  (LSE: BT-A) (NYSE: BT.US) announced it is in “preliminary stage” talks with shareholders in two UK mobile network operators, including O2, with regards to it purchasing their UK mobile arms.

BT spun off O2 in 2002 to repay some of its mounting debt pile. O2 was then bought outright for £18bn by Telefónica S.A in 2005. BT is planning to re-enter the mobile space next year through a mobile virtual network operator agreement with EE, where it can offer own-branded mobile deals using EE’s networks. Today’s announcement implies BT wants control of its own network once again, however.

But after this news, where is BT’s strategy heading, and does that make it a buy?

Four-Pronged Attack

Most households have some sort of access to TV, internet, a landline and a mobile phone, often with an individual contract from different providers for each one. BT’s Consumer division is focusing on providing all of these services in a bundle. It was the only division to grow in Q3, and so it’s no wonder the strategy focuses heavily on this department.

While the MVNO contract with EE completes BT’s “Quad Play” offering, fully owning O2 would give BT a number of advantages. For a start, they would instantly gain O2’s 23.6m customers and a great opportunity to cross-sell TV, Broadband and Landline services.

Secondly, having customers buy both mobile and Wi-Fi from BT creates pricing synergies; when at home, mobile calls can be channelled through BT Wi-Fi for less cost, while the company’s existing five million Wi-Fi-hotspots could be used for cheaper calls in public.

These savings could lead to either cheaper services for customers, or simply higher margins than competitors, either of which is good for BT.  

BT also bought 4G access in February 2013, possibly an early sign of its intent to move into the mobile space. 4G users typically consume twice as much data a month as 3G users, leading more customers to opt for higher price data tariffs.

Sporting Strategy

In the meantime, however, the strategy has been to ensure they have the most comprehensive value offering in the quad play space, and they have been rather savvy in doing so. The addition of BT Sport has proved a masterstroke, with it already reporting 3m direct customers and 5m households reached by its channels. After all, televised sport is a must-have for a lot of us, and those that buy BT Sport are likely to end up with a BT landline and mobile as well.

Furthermore, the company has just secured an £897m three-year rights deal to show every game in the Champions League. These sporty customers are highly unlikely to leave the service while the company retains exclusive sports rights. Snapping these rights away from Sky gives customers a strong incentive to leave BT’s rival.

Netflix is also available to anyone who owns a BT television YouView box. This further in-built value continues to separate BT from the pack, as does the company’s fibre broadband network that covers two-thirds of the UK. This allows BT to offer the high-speed connections increasingly demanded by customers.  

So, BT has the potential to provide a strong quad-play offering with the unique games rights of BT Sport, strong fibre broadband and 4G services that could set it up for success in the medium term. However, trading on a P/E of 16 and yielding less than 3%, growth seems to be priced in and I would need more of a margin of safety to invest.

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