The transaction will make the German telecommunications giant the largest individual shareholder in its British peer, and turn the U.K.'s leading fixed-line telecom and broadband company into a "quadruple-play" provider with a full range of mobile and fixed-line services.
BT, formerly known as British Telecom, said it will finance the transaction through a 1 billion pound share placing and new debt, while EE's existing borrowings, currently totaling 2.1 billion pounds, will remain outstanding.
BT sees cost and capital expenditure savings of 360 million pounds a year in the fourth year from the purchase, which marks its return to wireless services after it spun off what was the BT Cellnet operation in 2002 to create what is now EE's rival 02.
The enterprise value includes EE's adjusted net debt of 2.3 billion pounds, plus equity of 10.2 billion pounds, and values the target at a multiple of 6 times adjusted 2014 earnings before interest, taxes, depreciation and amortization and 9.6 times adjusted operational free cash flow.
Moody's Investors Service immediately affirmed BT's investment grade ratings with a positive outlook, saying this would reflect the "prudent financing" of the EE acquisition and the strengthened business risk profile of the combined entity. However, it added that the assessment rests on BT' staying disciplined in its acquisition of major soccer rights and keeping its pension deficit under control.
Moody's said it affirmed BT's Baa2 issuer rating, Baa2 senior unsecured debt ratings and Prime-2 (P-2) short term ratings of British Telecommunications plc and British Telecom Finance BV.
Beyond the immediate financial implications, the deal gives BT control of the U.K.'s most advanced 4G network with the largest customer base for fourth-generation wireless services of any operator in Europe, and 4G coverage reaching more than 80% of the population and 3G coverage reaching 98%. It will also allow BT to bundle its existing fixed-line telecom, broadband and cable television services with EE's mobile services and cross-sell all four products between both sets of customers.
"This is a major milestone for BT," said BT CEO Gavin Patterson in a statement, adding that it would help to "create the leading converged communications provider in the U.K."
EE currently also has the largest customer base of any U.K. operator across all generations of wireless service, although it would be pushed into second place if the mooted combination of O2 with Hutchison Whampoa Ltd.'s 3 U.K. network goes ahead. With the takeover, BT will gain access to 31 million EE customers. Of these, 24.5 million are direct mobile customers, 3.7 million are virtual network customers -- they buy EE mobile phone services using a branded intermediary such as Virgin Mobile -- and the remainder are either fixed broadband customers or use machine-to-machine connections.
Under the terms of the deal, Deutsche Telekom will receive about 1.2 billion new BT shares and a small cash payment valuing its stake at 5.1 billion pounds. Orange will receive 400 million new BT shares, valued at around 1.7 billion pounds and cash of about 3.4 billion pounds. The two currently own equal 50% stakes in EE.
The deal is based on BT's share price of 411.5 pence on Dec. 4, 2014, and the exact structure of the payment depends on BT's share price at completion. But there is a cap-and-collar protection mechanism limiting the final adjustment to the cash element needed to keep the total value to the two sellers at 5.1 billion pounds apiece. The mechanism allows the share to move only within a band of 4% either side of the Dec. 4 price, implying an upper limit of 428 pence and a lower limit of 395 pence a share.
Just before noon in London on Thursday, BT shares were 4% at 440 pence, well above the cap provided for under the deal, meaning the deal is worth more than 12.5 billion pounds.
BT is advised by Goldman Sachs (GS) ; Ed Byers and Hugo Baring of JPMorgan Chase's (JPM) U.K. investment banking arm J.P. Morgan Cazenove; and Perella Weinberg Partners' Philip Yates and Paulo C. Pereira. Legal advice is from Freshfields Bruckhaus Deringer LLP.