Telefónica acquires UK mobile operator O2 for £17.7B

October 31, 2005

4 Min Read

MADRID, Spain -- The Boards of Directors of Telefónica and O2 are pleased to announce today thatagreement has been reached on the terms of a recommended cash offer to be made byGoldman Sachs International and Citigroup, on behalf of Telefónica, or a wholly-ownedsubsidiary of Telefónica, to acquire the entire issued and to be issued share capital of O2.The Offer will be at 200 pence in cash for each O2 Share which values O2 at approximately£17.7 billion.

Highlights:

  • The combination with O2 is a logical step for Telefónica in pursuing its strategic goal ofproviding its shareholders with both growth and cash returns. Telefónica believes thatthe combination with O2 will:

    • accelerate Telefónica’s superior growth profile relative to its peers

    • provide enhanced scale by entering two of Europe’s largest markets, Germany andthe UK, with critical mass

    • balance Telefónica’s portfolio across businesses and regions

    • generate an estimated run-rate of EUR 293 million (£199 million) of quantified annualoperating cost and capital expenditure synergies by 2008

    • be immediately accretive to earnings per share, cash earnings per share and freecash flow per share1

    • enable Telefónica to preserve its stated shareholder remuneration policy based ondividends and share buy backs

  • The Offer of 200 pence per O2 Share represents a premium of approximately 22 percent. over the middle market price of an O2 Share of 164.25 pence at the close ofbusiness on 28 October 2005, being the last dealing day before this announcement.

  • O2 Shareholders will be entitled to receive an interim dividend for the six months ended30 September 2005 of 1.54 pence per O2 Share, which is expected to be paid on 2 December 2005 to the registered holders of O2 Shares at the close of business on 11November 2005.

  • O2 will retain its existing brand and will continue to be based in the UK. O2’s operatingbusiness will be led by the current management and Sir David Arculus and Peter Erskinewill join the Board of Directors of Telefónica.

  • The Directors of O2, who have been so advised by JPMorgan Cazenove and MerrillLynch, consider the terms of the Offer to be fair and reasonable. In providing advice tothe Directors of O2, JPMorgan Cazenove and Merrill Lynch have taken into account thecommercial assessments of the Directors of O2. Accordingly, the Directors of O2unanimously intend to recommend holders of O2 Shares to accept the Offer as theyhave irrevocably undertaken so to do in respect of their own aggregate beneficialshareholdings. Merrill Lynch is deemed to be a connected party to Telefónica. As aresult, only JPMorgan Cazenove is acting as the independent financial adviser to O2 forthe purposes of providing independent advice to the Board of O2 on the Offer under Rule3 of the City Code.

  • Telefónica has received irrevocable undertakings to accept the Offer from the Directorsof O2 in respect of 2,820,573 O2 Shares in aggregate, representing approximately 0.032per cent. of O2’s issued share capital. These undertakings will remain binding in theevent of a higher competing offer.

  • A Loan Note Alternative of up to £1 billion will, subject to certain conditions, be madeavailable.

  • The acquisition will be implemented by way of the Offer unless Telefónica elects toimplement it by way of a Scheme of Arrangement.



The Offer is conditional, amongst other things, upon receiving the required regulatoryclearances. Telefónica expects the Offer to complete in January 2006. Further informationon the terms and conditions to which the Offer will be subject are set out in Appendix I andwill be set out in the Offer Documentation, which Telefónica expects to despatch to O2Shareholders in November.

The Chairman of Telefónica, Mr. César Alierta said:

“O2 is an excellent company that, driven by a top class management team, has been able tobecome one of the highest growth mobile operators in Europe. Its integration in theTelefónica group will enhance our growth profile, it will allow us to gain economies of scale, itwill open the group to the two largest European markets with sizeable critical mass and it willbalance our exposure across business and regions. This transaction will be accretive fromyear one, it will allow us to preserve our shareholder remuneration policy and, in short, it willreinforce Telefónica’s strategic goal of offering the best combination of growth and cashreturns to our shareholders.”

Commenting on the Offer, Sir David Arculus, Chairman of O2, said:

"This Offer from Telefónica, which reflects the value created since demerger and thepotential of the O2 Group going forward, is an excellent opportunity for O2 Shareholders torealise significant value in cash now. The combination of O2 and Telefónica will be apowerful force in international communications. Our successful brand will be retained andextended bringing benefits to both customers and employees as part of an enlarged,strengthened group.”Commenting on the Offer, Peter Erskine, the Chief Executive of O2, said:

“Since the emergence of O2 as a listed company in 2001, it has enjoyed considerableoperational success and, in the process, delivered real value to shareholders. Thistransaction brings together two companies which are growing strongly with highlycomplementary geographical activities.”

Goldman Sachs International and Citigroup are acting as financial advisers and corporatebrokers to Telefónica. JPMorgan Cazenove and Merrill Lynch are acting as financialadvisers and corporate brokers to O2.

Telefónica SA

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