O2 Could Challenge BT in U.K. Broadband Market

(Bloomberg) -- Telefonica SA is weighing a push into the U.K.’s fixed-line broadband market as it reviews options for its mobile business O2, in a potential challenge to Britain’s dominant phone company BT Group Plc, according to people familiar with the matter.

The deliberations are at an early stage, no plan has been presented to the Spanish company’s executive committee and it may decide to leave the U.K. business unchanged, said the people, who asked not to be identified as the matter is confidential.

BT shares fell as much as 2.1 percent on the news.

If it does decide to enter Britain’s landline business, Telefonica could lease bandwidth wholesale from BT or Liberty Global Plc’s Virgin Media, build its own network or acquire an established player. Merger and acquisition opportunities are limited, so the company needs to look at an array of alternatives, said one of the people.

A spokeswoman for Telefonica declined to comment.

O2 Could Challenge BT in U.K. Broadband Market

That the Madrid-based company is contemplating such a big U.K. investment suggests a new commitment to O2, which it tried to sell for more than 10 billion pounds ($12.9 billion) in 2015 to lower its debt burden. When the sale was blocked by regulators, it resolved to sell O2 shares in an initial public offering. That was scuppered by market turbulence after Britain’s vote to leave the European Union.

Telefonica says its debts are now manageable and can be repaid gradually using cash from its ongoing business without resorting to major asset sales.

It has a past involvement in British fixed-line services, having built a broadband reselling business with 560,000 customers that it sold to British Sky Broadcasting, now Sky Ltd., in 2013.

Profit Driver

The parent company has sought to improve service quality at O2 and stop customers defecting to rivals. The unit’s profit growth was the strongest in the Telefonica group last year in the face of tough competition from CK Hutchison Holdings Ltd.’s Three U.K., Vodafone Group Plc and BT’s EE mobile network. O2 had revenue of 6.8 billion euros in 2018 and 25 million customers as of December.

What Bloomberg Intelligence Says:

“The threat of a new entrant may lead the U.K.’s wireline operators to look harder at convergence-driven mobile M&A.”
--Erhan Gurses and Tom Ward, telecom analysts
Click here to read the research

BT has been integrating EE’s technology since acquiring it in 2016 and last year began to offer premium bundles of fixed and wireless services as well as TV. Telefonica already offers such converged services in its home market of Spain.

The only national fixed-line network in Britain beside BT’s is Liberty’s Virgin, which lacks its own cellphone infrastructure, resells mobile services over the EE network and doesn’t currently allow other broadband companies to use its fixed network.

Telefonica Chairman Jose Maria Alvarez-Pallete has said the market switch toward converged mobile and fixed-line offerings is driven by supply, so a country’s dominant phone company is usually the one to kick off the process before others follow suit.

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