Telefonica has held talks regarding a possible sale of its British unit O2 to Hutchison Whampoa, the Hong Kong group which owns the UK’s smallest mobile network operator, Three.
Telefonica has been working with UBS in the UK since consolidation talk…
Telefonica has held talks regarding a possible sale of its British unit O2 to Hutchison Whampoa, the Hong Kong group which owns the UK’s smallest mobile network operator, Three.
Telefonica has been working with UBS in the UK since consolidation talk erupted late last year following BT’s decision to buy a mobile operator.
BT had held talks with both O2 and EE but ultimately plumped for the latter. Telefonica is, however, not in a rush to sell the business.
A person familiar with the matter told TelecomFinance that a sale to Hutchison was not Telefonica’s only option, and that it could do a convergence deal with triple-play operators Sky or TalkTalk, or even take O2 public.
A report in The Sunday Times citing City sources said Hutchison was being advised by Moelis & Co and could pay up to £9bn for O2.
Both Telefonica and Hutchison declined to comment.
Last week, Hutchison’s managing director Canning Fok told reporters in Hong Kong that European consolidation was a top priority and that more acquisitions would come after that.
Hutchison has already bought Telefonica’s Irish business, O2 Ireland, and Orange’s Austrian unit, driving four-to-three mobile consolidation in Europe. However, the European Commission’s regulatory reviews were lengthy and the remedies Hutchison had to offer were substantial.
In a note to clients, Berenberg analyst Paul Marsch said his firm valued O2 at £9.4bn and a sale at £9bn would be disappointing.
However, his main concern about a deal was the potential regulatory implications. He pointed out that recent European Commission decisions in Ireland and Germany enforced capacity agreements for MVNOs and gave them access to the consolidators’ 4G networks.
“The risk that the consolidating players therefore take on, to some degree on behalf of the whole market, is of opening up a better market for UK MVNOs like Virgin Media, Tesco and TalkTalk, among others,” Marsch wrote.
However, he argued that the MVNOs had already proven disruptive and wondered how much more potential there was for them to challenge further.
Berenberg also suggested that since Three had a network sharing agreement with EE while O2 was tied up with Vodafone, merging Three and O2’s networks would be a complicated process and may eat into the potential network synergies.
BT’s move into consumer mobile was the catalyst for convergence in the UK. The fixed-line incumbent said in November it had been approached by the owners of O2 and EE regarding a potential transaction where BT would buy their UK mobile businesses.
In mid-December, BT said signed an exclusivity agreement with Deutsche Telekom and Orange, EE’s shareholders. The non-binding terms of the contract would see BT pay an enterprise value of £12.5bn (US$19.6bn) for EE, which the continental giants own on a 50-50 basis, in cash and stock.
BT is currently undertaking due diligence and a final agreement could be reached in the coming weeks.
