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BT confirms deal talks with Telefonica's O2

Britain's BT Group is in early stage talks with Spain's Telefonica on a deal to buy UK mobile operator O2, with two sources saying it has also begun negotiations with EE as it seeks a return to the British consumer mobile market.

Both Telefonica and BT confirmed they were in talks after Spanish website El Confidencial reported that O2 could be sold in return for a 20 percent stake in BT as part of a "strategic alliance" to strengthen the two groups.

BT also said it was in talks with another British mobile operator, which two sources close to the matter identified as EE, owned by Orange and Deutsche Telekom.

Pedestrians pass a Telefonica SA fixed-line public telephone in Madrid, Spain
Angel Navarrete | Bloomberg | Getty Images
Pedestrians pass a Telefonica SA fixed-line public telephone in Madrid, Spain

"We have received expressions of interest from shareholders in two UK mobile network operators, of which one is O2, about a possible transaction in which BT would acquire their UK mobile business," BT said.

"All discussions are at a highly preliminary stage and there can be no certainty that any transaction will occur."

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Telefonica has said that O2 remains core to its business but has not ruled out asset sales to meet a target to reduce debt to less than 43 billion euros ($54 billion) by year-end.

A deal would bring O2 back into the BT fold, having been spun off from the former British telecoms monopoly in 2001 and then bought by Telefonica eight years ago.

BT, which leads the British market in broadband, is already working on a complicated plan to get back into consumer mobile using a combination of its own airwaves, in-home receivers that route calls over its fixed-line network, wifi hotspots and fill-in capacity rented from EE.

A Telefonica executive did not rule out a sale of O2 at an industry conference last week, saying the company would have to "evaluate its options" if more of the market moved to bundling fixed and mobile telecoms services.

UBS analysts put O2's value at nearly 10 bln pounds on Monday.

"We value O2 UK at 12 billion euros (9.6 bln pounds) compared to a BT market cap of 31 billion pounds," they said in a note to clients. "An integration would be a sound strategic move for both companies in our view, given the complementary nature of their operations and their seemingly very good commercial fit."

O2 accounted for 14 percent of Telefonica's global sales in the first nine months of the year and 10.5 percent of its core earnings.

Deutsche Telekom and Orange, which put plans for an initial public offering of EE on ice this year, had no immediate comment.

Shares in BT rose to a nine-week high after the talks were revealed on Monday and were trading up 2.8 percent at 390.5 pence by 1101 GMT. Telefonica shares rose 0.9 percent to 12.58 euros.

Orange gained 1.1 percent to 13.86 euros, with Deutsche Telekom up 1.2 percent at 13.32 euros.

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