BT Group Plc (BT/A) started exclusive talks to acquire Deutsche Telekom AG (DTE) and Orange SA (ORA)’s British wireless venture EE for 12.5 billion pounds ($19.5 billion), moving ahead with a deal that’s set to spur more mergers in the U.K. telecommunications market.

The payment, in cash and new BT shares, would be split equally between Deutsche Telekom and Orange, the companies said yesterday. The period of exclusivity will last “several weeks” and any deal will need approval by BT shareholders, the London-based carrier said. Deutsche Telekom and Orange beat Telefonica SA (TEF), which was negotiating to sell its U.K. division O2 to BT.

A takeover of EE would give BT access to 28 million wireless customers and create the country’s largest provider of bundles of mobile, home-phone, TV and Internet service. Europe’s wireless and fixed-line providers are combining to boost customer loyalty and monthly bills as consumers increasingly buy different services from a single provider.

“It’s a very smart move from a strategic point of view to launch quad-play, and they picked an asset they know the value of very well,” said Vincent Maulay, an analyst at Oddo & Cie. in Paris.

Maulay said the purchase price, equivalent to 8 times the target’s earnings before interest, taxes, depreciation and amortization, topped his 12.2 billion-pound estimate.

New Ownership

BT shares fell 0.4 percent to 396.60 pence at 8:49 a.m. in London. Orange added 2 percent in Paris, Deutsche Telekom rose 0.3 percent in Frankfurt, and Telefonica dropped 1.4 percent in Madrid. A Telefonica representative declined to comment.

If a final agreement can be reached, Deutsche Telekom will own 12 percent of BT, and Orange 4 percent plus a higher proportion of the cash payments. For the two sellers, a deal would mean the end of a four-year-old venture that was the first in the U.K. to offer high-speed, fourth-generation wireless service.

Deutsche Telekom, which would have the right to appoint one director to BT’s board, intends to remain a significant shareholder as it expects new bundled offers to boost revenue, said two people familiar with the matter.

The German carrier is open to buying Orange’s BT shares in the future to increase its stake and allow a full exit by the French partner, said the people, who asked not to be named because the deliberations are confidential. A deal isn’t imminent, they said.

Liberty Global

The talks may result in more deals as rivals try to keep up. Vodafone Group Plc, the third-largest U.K. mobile provider after EE and O2, is considering options including a combination with John Malone’s Liberty Global Plc, which operates the Virgin Media TV and broadband brand, people familiar with the matter have said. Hutchison Whampoa Ltd. (13), owner of U.K. mobile provider Three, is also examining whether to pursue its own deals, people with knowledge of the situation said last month.

BT reported net debt of about 7.1 billion pounds at the end of September. The proposed payment in a mix of cash and shares is meant to help BT maintain its “conservative financial profile,” it said. BT’s debt is rated BBB, the second-lowest investment grade, by Standard & Poor’s and Fitch Ratings.

High-Speed Network

Britain’s former phone monopoly has transformed itself over the past years, rolling out a high-speed fiber-optic broadband network and bidding for exclusive access to popular sports broadcasts. A deal may hurt BT’s ability to pay for TV rights ahead of the U.K.’s Premier League soccer auction next year. In 2012, as BT prepared to unveil its new sports channels, the company agreed to pay 246 million pounds a season for Premier League rights.

“Additional debt burden from a potential acquisition may weigh on BT’s ability to aggressively bid for content,” Bloomberg Industries analyst Erhan Gurses said in a note.

For now, wireless and fixed-line carriers in the U.K. are using wholesale partnerships to sell each other’s services. Vodafone plans to resell BT Internet in conjunction with a TV service next year. EE added a TV set-top box to its mobile and Web packages, and BT is due to start reselling EE’s mobile service — which it already offers to businesses — to consumers next year.

The same trend toward cross-selling services is taking off around Europe as mobile operators look for new ways to generate revenue. Slowing economies and price wars in several countries have led to sales declines. The U.K. has some of the lowest mobile prices in the European Union, according to the Organization for Economic Cooperation and Development.

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(Source: Bloomberg)