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By Kate Holton, Leila Abboud and Anjuli Davies
LONDON/PARIS, Nov 27 (Reuters) - BT Group's choicebetween buying Britain's number one or two mobile operator willcome down to whether the broadband leader wants to stretch tobuy EE, a higher quality, larger company, or take the lowerrisk, simpler option presented by 02.
The 168-year-old national fixed-line network operator hasbeen in talks with Telefonica's 02 and separately with EE, whichis owned by Orange and Deutsche Telekom, fornearly two weeks, people familiar with the situation said.
Analysts value EE at 11 billion pounds ($17 billion), and 02at 9.4 billion pounds.
At issue is not only the price the seller would accept butalso the structure, with regard to cash or shares or even assetswaps, and whether BT would undertake a rights issue, bankingand sector sources said.
Although credit rating agencies say BT can borrow up to 10billion pounds without hurting its ratings, the firm needs tohave the financial firepower to bid against pay-TV leader Sky in next year's auction of TV rights to show EnglishPremier League soccer matches.
The manoeuvring comes as the UK telecoms markets undergoes ashift towards "multi-play" offers of fixed and mobile broadband,home phone and pay-TV services and has galvanised mobile rivalssuch as Vodafone and Hutchison Whampoa's Threeinto actively looking for deals or partnerships.
As market leader for mobile services, with 24.5 millionsubscribers, EE is a growing business which got a headstart inoffering 4G mobile broadband. However, a sale could becomplicated by the need to negotiate with its joint owners whodon't always see eye to eye.
O2 is in second place in the market with 22 millionsubscribers and owns less than half the radio spectrum of EE,but could be cheaper to buy since it is smaller than EE andparent Telefonica is eager to bring in cash to pay down debt.
"BT is in a sweet spot," said one banker, who asked not tobe named. "Neither Telefonica nor EE are in a great position.They can compete on price but that means it is only going oneway -- down."
Rivals had been increasingly concerned this year by evidenceof BT pressing ahead on building its own hybrid, low-cost mobilenetwork for launch next year so it has a full "quad-play" ofservices on offer, prompting the approaches by O2 and EE,according to banking sources.
The operator that misses out on the BT deal could look towork more closely with another operator, such as Three, or afixed-line provider.
PROS AND CONS
BT's choice between EE and 02 is seen as similar to aprospective homebuyer trying to decide between buying a biggerhouse that is ready for moving into and a slightly smaller,cheaper house that needs some work.
One sector banker said EE was the better business. "The costsynergies are much higher. Only thing is, it's harder to do adeal with France and Germany, two national incumbents, so (it)could be trickier to execute."
EE, which holds about 33.8 percent of the market in terms ofmobile service revenue, has a superior network and 115 megahertzof spectrum compared to 02's 48 MHz and BT's 35 MHz. Itssuper-fast 4G network covers 75 percent of the population andhas attracted 5.6 million customers in the two years sincelaunch.
But EE's history has been problematic as a joint venturewhich merged the Orange UK and T-Mobile networks in 2010 and hasrebranded twice since, with the integration still to becompleted.
In comparison 02, which is neck and neck with Vodafone with 26.2 percent of the market in terms of mobileservice revenues, has adequate spectrum, national coverage, andstrong brand positioning among corporate customers. Since the 02network originated with BT, having been floated on the stockmarket in 2001, it could be a better fit.
"On paper maybe EE is a slightly better asset, but O2 isvery good, and has a solid customer base," said the sectorbanker, who sees more value in 02. "Both would work well for BT,and there is not a major difference in terms of synergies."
Cash is also a factor in doing a deal, with BT needing to beseen to have the financial firepower in next year's PremierLeague soccer rights.
However, one of BT's biggest shareholders told Reuters thathe would support the purchase of a mobile operator even if itmeant a rights issue. "It feels lower risk and evidently morefinancially attractive from day one," he said.
Telefonica has pitched a scenario where it would get a stakeof around 20 percent in BT, worth some 8 billion euros, and someadditional cash, sources close to the company said. It isunclear if Orange and Deutsche would consider anything similar.
But Bruno Grandsard, a portfolio manager at Axa InvestmentManagement, said BT had only winning cards to play.
"If I were in BT's shoes, I would look at buying the cheapestof the two assets and then work to improve its performance." (1 euro = 0.7909 pounds) ($1 = 0.6347 pounds) (Additional reporting by Paul Sandle, Pamela Barbaglia andHarro Ten Wolde; Editing by Greg Mahlich)
Vodafone (VOD)
