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In November 2001, as BT's debts spiralled out of control, the company was forced to hand its cellular subsidiary over to its shareholders in order to gain approval for a $10 billion pound rights issue. Since then, the UK incumbent has made little secret of its desire to return to the mobile arena. This ambition is being driven by the famous 'G' word - growth. Much to BT's frustration, as a pure-play fixed-line operator, the company is increasingly viewed, and valued, as a utility with stable, predictable revenues but with little opportunity for revenue expansion. The company needs a mobile play to inject growth back into its P&L. Nothing indicated this more starkly than the recent set of results to come out of the European telco houses. While BT posted a healthy 56 percent increase in profits, its revenues were virtually flat. By contrast, its contemporaries across the channel, France Telecom and Deutsche Telekom, both announced falling fixed-line revenues but experienced overall positive growth largely on the back of their expanding cellular businesses.

Acquiring mmO2 would address BT's growth problem. In its year-ending March 2003, mmO2 posted an EBITDA of $1.4 billion, up 98 percent over the previous year. Management at Europe's fifth-largest mobile phone company have impressed the industry with the successes achieved since the company split from its parent. CAPEX costs have been slashed, the UK and Germany operations have been restructured, O2 Netherlands has been sold, there are some 55,000 XDA and 23,000 Blackberry customers, and data now accounts for almost 20 percent of total revenues. At the same time, the company has successfully elevated the O2 brand to rival the likes of Orange and has recently launched its O2 Active mobile portal service to challenge Vodafone Live! and T-Mobile's T-Zones.

In this light, a BT acquisition of mmO2 might seem like a no-brainer. Rumours of an all share deal valuing the company at $7.5 billion were touted around this week. In return BT would get almost 19 million mobile subscribers spread across three countries - Ireland, Germany and the UK - along with the accompanying 2G and 2.5G network infrastructure.

Despite it attractions, this is definitely a case of buyer beware. Of mmO2's 19 million subscribers, 67 percent are in the UK and most will also be using BT as their fixed-line provider. Perhaps as many as 50 percent of mmO2 subscribers already have some relationship with BT. Consequently, network infrastructure assets would form a large part of any acquisition.

Looking specifically at mmO2, there have been a number of developments in its operating environment which may have a material impact on its performance. In Germany, KPN has become more aggressive in its fight for customer growth and could impact O2 Germany's subscriber acquisition and margins. O2 Germany is the country's smallest operator and while O2 Active is compelling, KPN's i-mode beat it to market by over a year. Consequently, it is able to offer richer content from a more established range of content providers. In the UK, O2 UK faces twin challenges of regulatory requirement to cut fixed-to-mobile charges and increasing competition from Hutchison's 3G service which has sharply decreased its voice changes. On top of this is mmO2's commitment to deploying 3G networks in the three countries in which it operates. In Germany alone there is an obligation to have 25 percent coverage by the end of this year.

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