The battle for customers is heating up in the telecoms world as rumours suggest thatTalktalk Telecom(LSE: TALK)andSKY(LSE: SKY) are now fighting over mobile network provider, O2 in order to compete withBT(LSE: BT.A) more effectively.
BTs 12.5bn deal to buy EE, the UKs largest mobile network group, has sent a shock wave throughout the UK telecoms sector.
This deal will mean that BT is one of the few providers that is able to offer customers quad-play media bundles on a national scale. Whats more, the size of the BT empire allows the company to offer deals that peers cannot, putting smaller providers like Talktalk and Sky on the back foot.
Debating a tie-up
O2 is currently owned by Spains Telefonica, which is looking to offload the mobile provider in order to pay down debt and there are plenty of bidders.Sky and Talktalk are both interested in bidding for O2, with Three owned by ChinasHutchison Whampoa also considering a 9bn takeover. Additionally,Vodafonesrival and owner ofVirgin Media,Liberty Mediahas shown interest.
Talktalk already has its foot in the door here, as the company inked a 4G agreement with Telefnica UK and O2 last year. The deal allowed Talktalk to roll out avirtual network effectively a rebranded version of the O2 national network. However, over time, Talktalk plans toaugment the network by distributing new home routers to its 4.2m broadband customers, which would also function as small mobile masts. Effectively, this would enable Talktalk to create its own small slice of 4G radio spectrum, reducing payments to O2.
Unfortunately, despite this strategy advantage over its peers, after acquiringTescosBlinkbox service, its unlikely that Talktalk would be able to stretch itself enough to fund the acquisition of O2.
And the same can be said for Sky, which recently consolidated its European operations by spending6.9bn to acquire European sister companies,Sky ItaliaandSky Deutschland.
After this deal the companys balance sheet is looking stretched, and an upcoming fight with BTfor the rights to televise the English Premier League could become a multi-billion pound battle. So, if Sky does decide to make a move for O2, City analysts believe that the company will have to undertake a rights issue to raise additional cash.
Still, it seems as if the group is set on becoming a major player in the mobile market. Indeed, at the beginning of December last year the company hiredLazard, the investment bank, to help it assess potential opportunities in the UK telecoms market.
So, what does all this deal making mean for shareholders?
Well, as companies like BT and Sky start to offer quad-play bundles, at low prices, its reasonable to assume that profit margins will shrink. Increasing competition across the telecommunications sector will force companies to increase their marketing spend, which could be bad news, as profits will fall.
Overall, consolidation could be good news for customers but bad news for shareholders.
With that in mind, The Motley Fool’s analysts went lookingfor other companies that couldtake the place of BT and Sky in your portfolio.
The companies they found are market leaders,have the best long-term prospects,illustrious histories andpaydependable dividends.
Thereport is completely freeand is only available for a limited time. So there’s no time to wait around.
So if you’re intrigued and want to discover the fiveshares we’re recommending, justclick herenow!
Get FREE Issues of The Motley Fool Collective
Get straightforward advice on whats really happening with the stock markets, direct to your inbox. Help yourself with our FREE email newsletter designed to help you protect and grow your portfolio wealth.