Vodafone looks at options as market shifts to 'quadplay'

Vodafone is looking at options for the future of its British mobile business including combining with a rival group, as it reacts to takeover discussions between BT and mobile groups EE and O2 .

The group has approached advisers to work on scenarios including possible acquisitions as it looks to add fixed-line infrastructure and TV operations to its mobile business, according to people familiar with the situation.

Vodafone's potential interest comes as the market shifts towards "quadplay" - bundled offerings that include landline and mobile contracts as well as broadband and TV. If one company can offer all the aspects of communications and TV, it could produce a domino effect with rivals having to follow suit.

Telefonica chairman Cesar Alierta opened the door to a wider global alliance with BT should it proceed with a cash-and-shares acquisition of its British operations. At a dinner on Thursday night, Mr Alierta said the talks to sell O2 were moving forward, adding that the groups had complementary businesses in the UK and other countries.

Three people familiar with the situation said Telefonica was pushing talks with BT more aggressively than rival EE, which is owned by Orange and Deutsche Telekom.

Nick Jones, partner at Cavendish Corporate Finance, pointed to BT's potential acquisition of a mobile business as "the start of a significant transformation in the UK mobile telecoms market with a number of the key players looking to secure their current market positions through further M&A activity".

Vodafone declined to comment. But the group has indicated in the past that cable group Liberty Global - which owns Virgin Media - would make the most obvious partner given their strategies are increasingly aligned.

Hutchison Whampoa, which owns Three, the smallest of the mobile groups in the UK, is also reported to be considering the implications of a potential BT deal. The group, which is controlled by Hong Kong billionaire Li Ka-shing, declined to comment.

If BT were to close either deal, it would become a dominant provider of both mobile and fixed-line telecoms services. The group cautioned this week that discussions with O2 and EE were preliminary. A deal for either company could value each at more than £9bn. BT could also pursue plans to launch its own mobile services

The group could fund the transaction using cash on its balance sheet, additional debt and a share placement to Telefonica - which is likely to maintain its BBB debt rating, according to Fitch - although one analyst said a rights issue backed by shareholders is seen as a potentially better option as BT may need additional cash to participate in the upcoming auction of Premier League rights.

Analysts at Societe Generale said BT was expected to opt for an M&A funding strategy consistent with its focus on obtaining a BBB+ profile in the future, "which would in our view require an adequate equity element in the form of shares/hybrids".

A cash element is seen as important for Telefonica, which is also keen to reduce its high levels of debt.

People familiar with BT's thinking said it was confident its shareholders would support a deal, in part because of a surge in its share price this week after the talks were confirmed. Shares climbed to their highest level in six months, valuing the company at £33.4bn.

BT, which is being advised by Goldman Sachs, declined to comment.

The confirmation of deal talks between the three sides has sparked considerable speculation about spin-off transactions, such as BT's other units that provide the basic infrastructure services to the telecoms industry. BT provides the "backhaul" underground pipes that connect mobile masts, which could lead to regulatory scrutiny if BT owns a dominant mobile business integrated into this network.

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