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Telefónica to sell its UK O2 mobile network to Hutchison

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© Flickr/CC-licence/Kake

Hutchison Whampoa, the owner of the UK’s fourth largest mobile operator Three, has confirmed that it has entered into exclusive talks with Telefónica to purchase its O2 UK business. The merger of the country’s second and fourth largest operators would still be subject to regulatory approval. At the end of last year, Telefónica put O2 up for sale with BT a possible buyer, until the UK fixed-line operator decided to purchase market-leader EE for £12.5bn instead.

Negotiations are expected to take several weeks, although both parties have confirmed that the indicative price for O2 would be £9.25 billion in cash – a welcome injection of funds for Spain’s Telefónica, which is seeking to reduce its debt to around €35 billion – with a further £1 billion based on future trading volumes. The multiples are in line with those of the BT-EE deal, roughly 7.5 times ebitda.

The transaction remains subject to satisfactory due diligence over O2 and obtaining the required corporate and regulatory approvals. A deal would result in the number of mobile operators in the UK falling from four to three, something that regulator Ofcom has in the past said it would seek to avoid. However, times change, and the realities of sustaining four nationwide networks and ensuring investment for future services are being called into question.

O2 has about 22 million subscribers, whereas Three has 8 million. A combined company would leapfrog it over current market leader EE, which has around 28 million subscribers (excluding M2M). That would also relegate Vodafone to last place, with its 20 million subscribers.

Reports first emerged about a possible deal last weekend, with speculation that it would be worth £9 billion proving quite accurate. As TelecomTV’s Ian Scales said on earlier this week, “in sticking with its four operator policy (if it does) Ofcom’s position would run counter to that of the European Commission’s digital agenda which envisages telecom consolidation across Europe. If Ofcom won’t budge it’s possible the case will be appealed to the European Commission. Even then, it may not be green flagged without remedial measures to compensate for the competitive deficit implied by a three operator market.”

A possible scenario is that the European Competition Commission orders the establishment of extra MVNOs in the UK, although whether or not such measures are enough to ensure proper competition is debatable. Meanwhile, consumers and businesses should brace themselves for likely price rises for their mobile services.

Also in question is the network sharing arrangement in place between O2 and Vodafone, when they created the Cornerstone joint company in 2012 to run their 2G and 3G networks. In August last year, Vodafone and O2 signed a 10-year agreement with infrastructure provider Arqiva to use its network of 16,700 masts for 4G rollout. Presumably, a deal between Three and O2 would result in Cornerstone having to be disbanded.

It would certainly mark a serious return to mobile (with no disrespect to Three) for Hutchison owner Li Ka-shing, who founded the then revolutionary Orange in the UK back in the 1990s – after a brief dalliance with the Rabbit CT2 network, and the least said about that the better. But Three has suffered from a perceived lack of investment and scale, and has struggled to increase its subscriber base and generate the much-needed revenues required to be a leading player in mobile.

Satellite TV and broadband company Sky has still to make a serious move in the UK mobile market, as has cable operator and MVNO Virgin. Given today’s developments, one of those could enter a partnership with Vodafone. It is likely that we will see more consolidation and developments in the UK comms market within the next few months.

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