BT in talks to buy O2 -- unless it buys EE instead

A decade after selling it off, BT is in talks to buy O2 and create an all-conquering combination of broadband, landline, TV and mobile services. That is, unless it buys EE instead.

"We continue to develop our own plans for providing enhanced mobile services to business and consumer customers," BT says in a statement. "We have been exploring ways of accelerating (plans), including assessing the merits of an acquisition of a mobile network operator in the UK.

"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 already has plans to get back into the mobile market, using EE's masts and infrastructure -- and EE is reported by the Telegraph to be the other network courting BT for a possible sale. EE is currently jointly owned by French company Orange and Germany's Deutsche Telekom.

O2 is owned by Spanish telecoms company Telefónica. Reports from Spain's El Confidencial suggest a sale could leave Telefónica with a 20 per cent stake in BT.

Last week Telefonica's chief operating officer Jose Maria Alvarez-Pallete suggested that the trend towards offering converged services -- broadband and TV bundled in with phone contracts -- could prompt the sale of O2. "If the market goes convergent," he said, "then we will need to evaluate our options."

Convergence is BT's middle name: it already has broadband and landlines sewn up, and offers TV as well. Currently, BT Mobile is only for business customers, and although BT owns a chunk of 4G spectrum, that's largely intended to bolster its existing Wi-Fi network. So once BT adds a potentially lucrative consumer mobile service, it has four of a kind -- known as a quad-play service.

"Purchasing O2 or EE would give BT a strong mobile arm to support its quad-play strategy," says industry analyst Kester Mann of CCS Insight. "With its fixed-line and TV assets, the company could assume a very dominant position. Rivals such as TalkTalk, Virgin, Sky and Vodafone will be concerned."

It may be the UK's second-biggest mobile network -- behind EE -- but O2 doesn't have any fixed-line assets, which means it could be left behind by the convergence trend unless it links up with another company.

If BT was to buy O2, it would bring the mobile network full circle. O2 began life in 1985 as Cellnet, a joint venture between BT and security business Securicor, of all people. In 1999 BT took sole ownership and the company became BT Cellnet, before the network was spun off to become O2 in 2002. It's been owned by Telefónica since 2005.

As always, any merger or acquisition, whoever BT chooses, would have to be approved by competition authorities. Kester Mann believes regulatory approval would be easier for a combination of BT and O2, because a combination of BT and EE would create a more dominant mobile and fixed-line provider.

Before we get too excited, however, both BT and Telefónica caution that, "All discussions are at a highly preliminary stage and there can be no certainty that any transaction will occur."