BT Unplugged

Takeover's logic is at risk as rivals like Sky and Vodafone bundle more services

BT's celebration of its acquisition of mobile carrier EE may be only short-lived.

BT Rising

Shares of the telecommunications provider have climbed over the past five years

Source: Bloomberg data

Britain's biggest fixed-line telephone provider finally received regulatory approval on Friday for it 12.5 billion-pound ($18 billion) takeover of EE, the country's largest mobile operator.

The deal is a response to consumer demand to buy broadband mobile services from a single provider. It lets BT do that -- without the cost of building its own mobile network.

Despite BT's promises to wring 280 million pounds of costs out of the business by 2020, the move is a clear risk to operating margins. BT, whose 35 percent Ebitda margin is among the highest in Europe, is buying a business with a margin of 27 percent.

Instead of reducing competition, the takeover may instead intensify it by encouraging rivals to step up their efforts to bundle more services: Sky is poised to expand into mobile this year and Vodafone, traditionally a mobile provider, recently added broadband and will soon add television.

That means there will be five companies offering triple and quadruple-play bundles to U.K. homes and businesses -- creating pressure on prices and forcing firms to spend more on marketing to woo customers. In contrast, France has four integrated operators, while Spain and Germany have three.

In Spain, Telefonica pushed bundles hard, giving discounts of up to 25 percent until roughly two-thirds of its customers were on all-included packages. By contrast, Deutsche Telekom was less aggressive and offered only 10 percent discounts, so adoption was slower.

Bundling up

Customers get discounts when they sign up for fixed and mobile services from one provider

Source: Raymond James research based on H1 data

Macquarie Research estimates that if BT gave customers a 5-pound discount on their bundles, it would absorb 140 million pounds of revenue, about 2.5 percent of EE's total, and 9 percent of operating income.

BT boss Gavin Patterson has sought to quell concern that there will be a "convergence war" by saying BT will be rational on pricing.

But his competition is fierce: Pay-TV powerhouse Sky could cause pain when it starts offering mobile to its 9 million customers. When it started offering broadband, it went from nowhere to second-place in the market in 10 years. Vodafone could retaliate to a BT-led raid on its high-spending business customers by pursuing home broadband subscribers since it has no base of customers to protect there.

These dynamics mean that consolidation in Britain is unlikely to bring about the "market repair" European telecoms operators vaunted during their recent merger spree. British mobile providers' operating margins have long been among the lowest in Europe: Vodafone's are 22 percent in the U.K., compared with 33 percent in Italy.

BT Calling

Shares of Britain's biggest fixed-line phone operator have outperformed the benchmark

Source: Bloomberg

Investors may be underestimating the risks to BT. As well as the EE deal, there's also the threat from telecoms regulator Ofcom's review, part of which will determine how much BT can charge competitors for using its national broadband network.

The stock is up 16 percent in the past year, compared with a 1 percent drop for the Stoxx Europe 600 Telecommunications Price Index (in pounds). BT is rated a buy or hold by about 80 percent of the analysts that follow it, they expect the stock to rise 10 percent in the next 12 months.

One sector executive recently likened the reshaping of the U.K. market to a complicated game in which each player sought to anticipate their rivals' moves. BT shareholders need to hope Patterson has brushed up on his chess skills.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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    Leila Abboud in Paris at

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    Edward Evans at

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