By Kate Holton
LONDON, Dec 16 (Reuters) - BT's move to buy mobileoperator EE is expected to put the former state-owned telecomsgiant back in pole position as fixed line and mobile servicesconverge, forcing rivals such as Vodafone to make costlymoves of their own to keep up.
BT on Monday entered into exclusive talks with the owners ofEE, Orange and Deutsche Telekom, afterplaying them off for weeks against rival suitor, Telefonica, showing the power the 168-year-old fixed-line operatornow wields with its vision of providing a unified fixed andmobile broadband Internet service.
With companies looking to offer bundles of mobile and fixedline broadband, telephony and pay-TV services from one provider,BT is seen as best placed to prosper with its plannedfixed-mobile services spiced up with exclusive TV content suchas Premier League soccer games.
The EE move also revives BT's rivalry with Vodafone whichdates back to when they were the two biggest names in Britishtelecoms until a heavily indebted BT dropped out of the mobilemarket in 2001.
The prospect of a BT which has since been emboldened by thesuccess of its broadband strategy now jumping into top spot inthe mobile market has already caused Vodafone to review itsstrategic options, including whether it should buy cableoperator Liberty Global.
Meanwhile Hutchison Whampoa, the owner of Three,the smallest of Britain's four mobile network operators, hasbeen contemplating making a bid for O2 if BT doesn't buy it,sources familiar with the matter have said.
"BT have done a fantastic job in the last five years," aneutral telecoms industry executive said, of a group which wasstill on its knees in 2008 and 2009 with two major profitwarnings.
"Vodafone could have taken its time, over the next three tofive years, (to buy or build its own fixed-line network) butwith BT buying a mobile business they're going to have to dosomething pretty quickly now."
The fight is likely to play out not only in the hunt forcustomers, but also potentially in the push for content and inthe offices of the competition regulator, where BT's rivals areseen likely to argue that it is gaining too great an advantage.
"We will follow whatever they (BT) do and the level ofaggressiveness in their pricing," Vodafone's chief executiveVittorio Colao told reporters recently.
"If they come harsh on mobile, we will come harsh too."
BETTER TO BUY
But having made it known earlier this year that it was goingahead with its "inside out" strategy of launching a hybrid,fixed-mobile consumer service in 2015 that combines fibrebroadband, wi-fi and 4G cellular elements, BT now finds itselfspoilt for choice in buying a complete mobile network.
"(It) makes a lot of sense," said investment firm and BTshareholder Woodford Investment.
"Free cash flow prospects should ultimately be far morerobust from the enlarged entity, less reliant on price increasesand cost rationalisation, with the focus moving to meaningfulgrowth from a cross-selling strategy."
By once again owning both mobile and fixed infrastructure,it will now be able to target those EE customers who do notalready take fixed line broadband from BT.
Vodafone has already said it will launch its own consumerbroadband and TV service next year, relying in part on its Cable& Wireless fixed line network and, like other rivals, on the BTnetwork to reach customers in their homes.
But breaking into the highly competitive home broadbandsector will be tough.
"With (Liberty's) Virgin, BT, Sky and TalkTalk that broadband market is very stitched up and it'sgoing to be very difficult for anybody else to get a toe in thewater," the industry executive said.
Vodafone already has a content partnership with Sky, enabling its mobile customers to access sports andother programming, and this could be extended to be a part ofVodafone's new broadband service.
However, Vodafone's acquisition of cable networks in Spainand Germany has prompted speculation as to whether it should buyalso buy a similar asset in Britain.
But media reports in late November that Vodafone wasactively looking at a deal to buy Liberty, Europe's leadingcable operator with a likely price tag of around $90 billion,sent Vodafone's share price sliding.
"Convergence is going to happen and they've got to be readyfor it," one of Vodafone's 15 biggest shareholders told Reuters.
"(But) I think shareholders would really struggle with aLiberty deal. The only realistic option ... is to try and do itorganically and that's not a great option either. To me thatfeels like the only palatable option, the least worst option." (Additional reporting by Leila Abboud; Editing by Greg Mahlich)
Vodafone (VOD)