‘British Telecom’ Or ‘Big Takeover’? Why BT Group plc’s Latest Move Is Bullish For The FTSE 100

I could write an article on the strength of BT Group (LSE: BT-A) (NYSE: BT.US)’s balance sheet… but that’s been done, and it’s largely unnecessary. What investors do want to know, though, is whether the teleco’s balance sheet can withstand a monumental takeover — like the acquisition of EE, for example. If the answer is yes, does that mean that BT is now in line to take control of the telephony market? Let’s do some exploring.

State of play

At present, BT offers an extensive fixed-line phone service, as well as a mobile phone service via its partnership “operator agreement” with EE. The telco is also in the TV and broadband business. Vodafone Group (LSE: VOD) (NASDAQ: VOD.US), on the other hand, is said to be launching its own broadband and TV services in Spring next year (with the help of Sky). That’s in addition to its already well-established mobile presence.

It’s effectively a big battle between BT/EE and Vodafone/Sky. Recently, though, BT had sought to shake off Vodafone with some big plans to move further into the mobile phone market.

BT was in fact planning to launch its own mobile service at great cost but, given these plans to take over EE, has shelved those ideas — for good reason, too. Indeed, if this deal goes ahead, BT will be the largest integrated player, offering bundled packages of mobile, fixed and television services.

The deal

So what exactly does this deal look like? Well, for starters there could be a £2 billion share placement. In addition, BT will raise at least £3 billion in the debt market. To avoid a debt overload, the telco says it could fund the remaining £5 billion cost by handing over 12% of its stock to Deutsche Telekom, and 4% of its equity to Orange.

Overall, if it goes through as planned, the takeover of EE could push BT’s debt burden (which stands at just over £7 billion) to more than £12 billion. Is that a problem? Apparently not. At least one of the big three credit ratings agencies has already given the deal its tick of approval based on the benefits BT will receive by inheriting a portion of EE’s profits through the takeover.

Game changer?

City analysts say BT will be keen to complete the takeover as soon as possible. In fact, it could be as early — assuming regulatory approval is swift — as spring. That’s in line with its previous plans to penetrate the mobile market, and is also around the same time that Vodafone will be establishing its footprint in the broadband and TV space.

From a portfolio perspective, it’s hard to see how this would change an investing bias towards BT. Vodafone made it clear earlier in the year it was reluctant to enter the TV and broadband market — and yet it appears the market has pushed it in that direction regardless. BT, on the other hand, already had a strong hold on the market, and is making sensible investment choices: ones to expand its reach, and ones to reduce costs.

Bullish for FTSE 100?

Another important point to make is that we’ve recently seen some large deals being made, causing a flurry of activity around the corporate finance desks in the City. Two examples are this latest deal, and also the takeover of Friends Life Group by Aviva. You don’t generally see finance events like this unless there is significant liquidity (and willingness) in the market. There are no guarantees, but my guess is that as long as Threadneedle Street holds out on tightening, we’ll likely see an appetite for more ‘big spending’. That’s a bullish indicator for the FTSE 100, but it’s also bullish for companies that are cashed-up and looking to both expand and cut costs. It’s one thing to be in a position to make a takeover, it’s another entirely to be in a market where there’s an appetite for such a transaction. It’s worth doing your homework to find out what companies may be in line for more corporate activity in 2015