The inexorable drive toward consolidation in the European telecommunications industry has moved a stage further with the $2.5 billion acquisition by British Telecom plc of Esat Telecom, Ireland’s second-largest telco and shareholder in Esat Digifone, Ireland’s second mobile operator.
The bid from BT was warmly welcomed by Esat Telecom, which had been the subject of hostile bids from Newtel (the short-lived merger between Norwegian telco Telenor and its Swedish counterpart Telia) and then from Telenor, which is also a major shareholder in Digifone.
The first approach came last November with a $1.6 billion bid from Newtel. When the Newtel merger collapsed in mid-December, Telenor made a fresh offer of $1.9 billion that it fully expected to be accepted even though the Esat Telecom board initially described it as inadequate.
Esat Telecom shares then rose strongly in expectation of a counterbid, with rumors of a “white knight” bid centering mainly on Telia and BT.
The level of interest in Esat Telecom might appear surprising given that it only offers services in countries with a population of less than 5 million, but the Irish cellular market is one of the fastest growing in Europe and Esat Digifone (in which BT would hold a 50.5-percent stake) controls almost half the Global System for Mobile communications market.
Since it entered the business in 1992, Esat Telecom has firmly established itself as the No. 2 operator in Ireland and competes with former monopoly Eircom across all sectors of the market. It is also building Ireland’s only completely fiber-optic network and has connectivity to the United Kingdom and several international cable systems.
While relatively few industry observers expected BT to be the eventual white knight, the deal is in line with its policy of buying into “second” operators around Europe. BT already has interests in 12 European countries, including a 50-percent stake in Dutch telco Telfort, a 45-percent stake in German operator Viag Telekom and a 26-percent interest in Cegetel (France).
A BT spokesman confirmed that buying into second operators was its preferred strategy, a point frequently made by company Chairman Iain Vallance. “Our policy is to acquire stakes in telcos who are challenging the incumbent operator. This means that the company retains the local knowledge and relationships which are crucial to its initial growth while gaining the resources that are vital for its future development.”
The deal came as no surprise to Eddie Murphy, a telecommunications consultant with U.K. market analyst firm Analysys. “I have considered Esat Telecom a likely target for BT for some time. BT needed a fixed-line network in Ireland and was quite happy to let Esat Telecom undertake the work of putting it together. Perhaps only the timing was not ideal but the Telenor offer probably forced BT’s hand.”
Much of the speculation surrounding Esat Telecom has focused on its lucrative mobile business, but Murphy feels the fixed-line business has a great deal of potential. “Digifone is immediately attractive. However, Ireland-U.K. is one of the busiest telecommunications routes in the world and BT will be able to really hurt Eircom with a fixed-line network in Ireland.
“It is nonsense to assume that the future of telecommunications lies solely with mobile networks and therefore this fixed-line presence will be invaluable to BT.”
He also feels the proposed price is reasonable, even though Telenor had described its lower bid for a company “facing increasing competitive pressures” as one that carried a “significant degree of risk.”
“Telenor’s offer was below Esat Telecom’s market capitalization, whereas BT’s is slightly above and given the combination of short-term revenue from the mobile business and the long-term potential of the fixed-line network, it looks like a good deal.”
BT is likely to try to merge Esat Telecom with Ocean, its fixed-line joint venture with the Electricity Supply Board. Coupled with moves by the telecommunications regulator to allow open access to Eircom’s local exchanges, this would put BT in a strong position to increase its market share.
The future ownership of Digifone is unclear. BT may try to buy out Telenor’s 49.5-percent stake, although Vallance said that working in partnership with the Norwegian telco was the preferred option. BT and Telenor already work together in Germany, Sweden and Switzerland.
