Hutchison Says It’s In Exclusive Negotiations To Buy UK’s O2 For Up To £10.25B

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Today, Hong Kong-based Hutchison Whampoa released a statement saying that it is in exclusive negotiations with Telefonica to acquire mobile carrier O2 in the UK, offering to pay up to £10.25 billion ($15.3 billion, €13.5 billion ). Hutchison’s plan would be to merge O2 with its existing UK business Three to create the UK’s biggest carrier.

Of that £10.25 billion, £9.25 billion would be paid at closing and a further £1 billion would come through deferred interest sharing payments “after the cumulative cash flow of the combined businesses of Hutchison 3G UK Limited and O2 UK has reached an agreed threshold.”

Telefonica acquired O2 in 2005 for £18 billion, although at that time there were other assets in Ireland and Germany included that are not part of the deal now. BT reportedly made an offer to buy O2 in November 2014 for about £6 billion. The exclusivity period lasts for “several weeks,” Telefonica says.

This is the first time that Hutch has made a public statement about its intentions to buy the carrier, although there have been reports of the deal since last weekend, and O2 has been on the block since November 2014.

Yesterday, reports started to surface that noted a deal would be announced today. This is not exactly that, but the latest step in a bigger dance of consolidation in the UK market, with BT also in discussions to buy EE, a joint venture between T-Mobile and Orange.

For its part, Telefonica wants the cash from a sale of O2 in the UK to invest more in emerging markets. Based in Spain, Telefonica has been steadily building up its business in South America and looking to grab more market share in countries like Brazil.

[Update: Telefonica released its own statement about 2 hours after Hutchison’s, in which it noted: “This operation marks another step in Telefónica’s transformation process, initiated by the Company to become a leading digital telco and accelerate sustainable long term growth while maintaining an attractive remuneration policy. Additionally, this announcement occurs at a decisive moment for Telefónica, following a  period during which the company has been proactively managing its portfolio of assets…today’s agreement shows that Telefónica continues to lead the European consolidation process and it will allow the company to strengthen its financial flexibility.” Telefonica’s other consolidation moves have included merging operations in Germany and making a move to buy GVT, another carrier in Brazil.]

A merged O2 and Three would create the country’s biggest carrier, as per figures published by the FT (which uses a smaller total number of UK subscribers than Ofcom, 76 million). Together they would have 41% of the market with 31 million subscribers; EE would have 32%; and Vodafone would have 26%.

How much consolidation is too much, regulators may ask

A deal between Telefonica and Hutchison would not only need to be agreed on by the companies’ respective shareholders, but also but by regulators. Ofcom in the UK will have to be convinced by the two carriers that an acquisition would not affect competition and specifically lower prices for consumers. And because both carriers are internationally owned, there will likely be a final decision made by the European Commission’s Competition authority in Brussels.

The FT, in its report last night predicting a deal would be announced today (not quite), conjectures that as with previous merger deals in other European markets, it’s likely that if this deal is given the green light, it will also see the pair giving up some network, or network access, to much smaller competitors — MVNOs like Virgin Mobile, Tesco Mobile and Talk Talk that do not own any network of their own.

Right now, Three is the very smallest and newest of the mobile carriers with 8 million subscribers out of a total of over 83 million mobile users in the UK — or just under 10% — but it is also the most disruptive, offering lower prices for voice and data services than any of its competitors. It’s also growing the fastest, the company claims.

As a network that only came into existence in the wake of 3G services in the country, it has no “legacy” users on 2G-only services, and says that about 3.1 million of its customers are now taking 4G services — which it upgraded at no premium to existing tariffs.

There may be other hurdles, too. With Vodafone — the UK’s other major carrier — yet to enter the discussions in any public way, there may yet be more developments and changes before deals are decided.

One thing that seems more certain is that the UK — currently with three large mobile carriers (EE, O2 and Vodafone) plus Three — is on its way to more consolidation. This would be the second major step in that direction, after the merger of Orange and T-Mobile into EE in 2010.

Of all the UK operators, O2 has probably the most chaotic history in terms of its ownership.

It started out in 1985 as Cellnet, as a 60/40 joint venture between BT and Securicor, with BT buying out the latter’s stake in 1999 and rebranding it BT Cellnet. It then spun that division off three years later into its own independent company in 2002. Telefonica then acquired it in 2005 as part of its expansion into more European countries, subsequently putting other operations in Germany and the Czech Republic into the O2 brand.

But there have been many factors that have impacted the value of carriers in the UK and would have led Telefonica to rethink its ownership, apart from its focus right now on Latin America.

First of all, growth in the UK has slowed down considerably with mobile phone ownership at a saturation point. Then, European regulators have put a cap on how much carriers can charge for certain premium services like international roaming. Third, there is a lot of price competition for more basic services. Fourth, there is a looming threat of yet more pressure on prices if BT is successful in its bid to buy EE — which would give it a proper “quad-play” offering of voice, broadband, TV and mobile. (Nevermind that BT spun O2 off in the past to move away from that.)

Still, O2 has a notable role in the UK market. As the first carrier to have the iPhone when it first launched, and holding an initial exclusive on that similar to AT&T in the U.S., this gives the company a very large share of the UK’s iPhone users today, speaking to higher revenues per user overall.

We’ll update this story as it develops. Hutchison’s statement on the deal below.

HWL in Exclusive Negotiations with Telefónica
to Potentially Acquire O2 UK

(23 January 2015, Hong Kong) Hutchison Whampoa Limited (HWL), parent company of UK telecom operator Three UK, announced that it has entered into exclusive negotiations with Telefónica, S.A. over a period of several weeks for the potential acquisition of Telefónica, S.A.’s UK subsidiary, O2 UK, for an indicative price in cash of £9.25 billion which would be paid at closing, and deferred upside interest sharing payments of up to a further £1 billion in the aggregate payable after the cumulative cash flow of the combined businesses of Hutchison 3G UK Limited and O2 UK has reached an agreed threshold.  The timing and amounts of these payments will depend on the actual cash flows of the combined businesses.

The transaction remains subject to satisfactory due diligence over O2 UK, agreement on terms and signing of definitive agreements, and obtaining required corporate and regulatory approvals.  The negotiations may or may not result in any transaction.

Three UK, a subsidiary of HWL is the UK’s fastest growing 3G network operator covering 98% of the UK population and is now rolling out 4G to its customers.  It has won awards for Mobile Broadband, Roaming and Customer Support as well as for Best Value.

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