BT acquires EE – Market Efficiency

Due to British Telecom’s (BT) latest acquisition of EE, I am going to look into efficient market hypothesis, the markets’ reaction and whether this purchase was in their shareholders’ best interest.

On February the 5^th 2015, BT announced their £12.5 billion deal to buy EE (Financial Times, 2015).  Speculation started in November 2014 that BT may be looking at buying an established UK mobile network operator.  They released a press statement on 24^th November stating they have received expressions of interest from two UK mobile companies, with O2 being one of them (BT PLC, 2014).

Since this speculation BT’s share prices followed an increasing trend, this can be seen from 20^th November 2014.  I have circled this on figure 1 below.

 Figure 1 (Hargreaves Lansdown, 2014)

Efficient market hypothesis (EMH) implies that if new information is released about a company this will be incorporated into their share price, whether positive or negative (Malkiel, 2003). This can be seen in the above graph (figure 1). A generation ago, the general view was that stock markets were extremely efficient at processing new information and aligning this news with their share price.  It was believed that technical analysis, the study of past prices in an attempt to predict future prices, and analysing a company’s financial information, would not enable an investor to achieve higher returns.  Many people believed an equal return could be obtained by holding a portfolio of a random selection of individual stocks with comparable risk (Malkiel, 2003).

Fama (1970) produced three levels of market efficiency based on information available, weak (historical prices), semi-strong (publicly available information) and strong form efficiency (private information) (Larsson & Jarrow, 2012).  BT’s share price has clearly been impacted by the decision to purchase EE therefore; this proves it cannot follow weak form efficiency as this is solely based on historical information and the share price has been reflected by public information.

BT’s share price began to increase before the information was officially announced this is known as anticipatory price movements, this does not surprise me as the public realise the potential behind these two successful companies becoming one.  Many investors bought into BT from the speculation or an information leak of their new acquisition. This is high risk as there was no information for certain, however this would provide them with the highest return. 

BT made an additional announcement on the 15^th of December stating they were negotiating with EE to enter an exclusivity agreement.  This created further hype and the shares further increased by 7p that day (Hargreaves Lansdown, 2015).  You could argue that the majority of investors purchasing anticipating this acquisition have already bought in, three weeks after their initial statement they would be reacting on old news.  Was this potentially a clever move by BT in order to keep them in the news and increase awareness of this acquisition? I think so.

Nearly three months after the initial speculation, BT announces they have sealed the deal with EE at £12.5b.  BT hopes this acquisition will accelerate their current mobility strategy.  They have previously stated they were interested in entering the mobile operating market however their main focus was landlines and broadband.  By entering the market through purchasing a successful existing UK mobile network they will gain a better understanding and knowledge of what is needed in order to succeed.  They can combine their knowledge in order to thrive in the communication industry, especially as Deutsche- Telekom will receive shares equivalent to 12% of BT, now BT’s largest shareholder (The Telegraph, 2015).  Their aim is for their customers being able to benefit from the combination of fibre broadband, wi-fi and 4G. BT now owns the UK's most advanced 4G network. A positive future for both their customers and shareholders? As a BT customer myself, I am excited to discover what the future may hold for them.

Since the official announcement of this acquisition BT’s shares soared. The share price increased 19p, to 442p, on the day it was announced (5^th February 2015). This continued to increase and reached 460p on the 11^th February (Bloomberg, 2015).  This shows how the release of new information can have an impact of the share price, further showing it has followed semi- strong from efficiency.  This also goes against Kendall’s theory that share prices follow a ‘random walk’ and there are no trends or correlations that could be used in order to predict future prices (Kendall & Hill, 1953).

This then raises the question of whether this was in the shareholders’ best interest.  BT’s Chief Executive, Gavin Patterson, released a statement on the day the deal was announced saying ‘the deal provides an attractive opportunity for BT to generate considerable value for shareholders, with significant operating and capital investment efficiencies supported by our tried and tested cost transformation activities’.

So far the announcement has added value for BT’s shareholders, the share price has increased over the past three months. A sign of the shareholder’s approval?

BT expect to save on operating costs and capital expenditure by about £360m every year by the fourth full year following the transaction (Financial Times, 2015).  Could this mean an increase in the profits, therefore higher dividends for their shareholders? However, BT released information on how they would be funding this new acquisition through raising £1bn through selling shares and the use of debt.  By increasing their debt, shareholders have a reduced chance of getting dividends as debt repayments have a higher priority. As their projected savings are forecasted by their fourth year, this could mean that BT might retain dividends in the short term.

I will go into further detail about BT’s capital structure purchasing EE and their cost of capital in my next blog.

References

Bloomberg Business (2015). BT Group Plc. Retrieved from http://www.bloomberg.com/quote/BT/A:LN

BT Plc Group (2014). BT Press Releases. Retrieved from http://www.btplc.com/News/Articles/ShowArticle.cfm?ArticleID=6CB3F5F7-A6D9-4607-85D3-4DB7176E3E4A

Financial Times (2015). BT seals £12.5bn deal to buy EE. Retrieved from http://www.ft.com/cms/s/0/9a74a0ec-ac6c-11e4-9aaa-00144feab7de.html#axzz3RAss4XRt

Hargreaves Lansdown (2015). BT Group Plc. Retrieved from http://www.hl.co.uk/shares/shares-search-results/b/bt-group-plc-ordinary-5p/share-charts

Kendall, M. G., & Hill, A. B. (1953). The analysis of economic time-series-part I: Prices. Journal of the Royal Statistical Society. Series A (General), 116(1), 11-34.Retrieved from http://www.jstor.org/stable/2980947?seq=1#page_scan_tab_contents

Larsson, M., & Jarrow, R. A. (2012). The meaning of market efficiency. Mathematical Finance, 22(1), 1-30. doi:http://dx.doi.org/10.1111/j.1467-9965.2011.00497.x

Malkiel, B. G. (2003). The efficient market hypothesis and its critics. The Journal of Economic Perspectives, 17(1), 59-82. doi:10.1257/089533003321164958

The Telegraph (2015). BT seals £12.5bn deal to buy EE - as it happened. Retrieved from http://www.telegraph.co.uk/finance/newsbysector/mediatechnologyandtelecoms/telecoms/11391848/BT-seals-12.5bn-deal-to-buy-EE-live.html