Strategically, BT (LSE: BT-A)(NYSE: BT.US)is in a great position to negotiate a hard bargain. If it pays over the odds for02orEE, however, I believe its equity valuation could easily plummet to 300p by mid-2016 a level where the shares traded 18 months ago.
The more BT stock rises, the higher the risk it will dive if a deal is not executed in early 2015.
This Weeks Events
BT confirmed on Monday that it could become more aggressive in M&A, targeting Telefonicas O2 mobile operations in the UK.
EE, the UKs largest mobile phone network,could also be a valid alternative for BT, although buying backO2 ought to beBTs preferred option, in my view. EEs owners, Deutsche TelekomandOrange, announced on Wednesday that theyare in exploratory discussions with BT.
The opportunity to snap up assets from distressed sellers such as SpainsTelefonicais almost too good to be true right now.
Telefonica needs growth in Latin America, which is a core market for the Spanish behemoth. From Brazil to Mexico, plenty of capital must be deployed there. DT and Orangehavebeen consideringa market listing of EE for some time, but EE isnt easy to value on its own. And for EEs owners,the UK isnt a core market, either.
BT should value O2 and EE at5bn and 7bn, respectively, including net debt a much lower valuation than that suggested by analysts, who believe BT will likely splash out up to 10bn for either target. Two separate low-ball bids would make lots of sense.
BT must stick with financial discipline: 02 and EE need heavy investment in the UK to be competitive. Their owners will unlikely want to devote precious time and resources to a market thatis less strategic than others.
If the purchase price is right, BTshares could easily surge to 500p by early 2016. Managing expectations plays a pivotal role, yet revenue and cost synergies could be meaningful. Overpaying is not an option, though. While its true that BT is hoarding cash, and free cash flow is getting better and better by the day, its pension deficit could still be problematic.
A Fully FledgedQuad-Play
Deeper penetration in the UK mobile world would cement BTs position in the broader consumer market, where it needs to grow. Customers want tailored packages from one provider: internet, digital TV andsmartphone connections all in one place, all from one supplier.
By acquiring O2, or EE,BT would become a fully fledged quad-play services provider.BTalready plans to offer mobile services in 2015 via amobile virtual network (MVNO) agreement with EE.If it acquires mobile assets, it will be able to sell its services toO2/EEs existing customers,growing at a faster clip. That would boost the value of its shares, which have been looking for direction for a year now.
Still, M&A at any price is not the answer. Otherwise, a price target of 300p would be conceivable.
I have never been convinced BT would be able to deliver value, but I am making up my mind, and I think it could soon belong to our top picks right now. Not interested in BT?
Then,in this new report published by our team you’ll find several stocks offering potential capital gains north of 20%,which is consistent with our track record!
BT has been too cautions in the last 12 months, yet the same doesn’t apply to a few companies mentioned in our report, which is completely free for a limited amount of time and comes without further obligations.
Click here right now to read it straightaway!
Alessandro Pasetti has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.