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Hutchison in Talks to Buy UK's O2 – Report

Merger between Hutchison's 3 and O2 would give rise to UK's biggest mobile operator by customer numbers.

Iain Morris

January 19, 2015

5 Min Read
Hutchison in Talks to Buy UK's O2 – Report

Hong Kong's Hutchison Whampoa is reported to have begun talks with Telefónica about a potential acquisition of the Spanish incumbent's O2-branded UK business.Hutchison Whampoa Ltd. (Hong Kong: 0013; Pink Sheets: HUWHY) already owns Three UK , the smallest of the UK's four national mobile network operators, but a tie-up with number two player Telefónica UK Ltd. , which operates using the O2 brand, would catapult it past market leader EE and Vodafone UK into pole position.3 (June 2014)EE (Sept 2014)O2 (Sept 2014)Vodafone (Sept 2014)Total8,00024,48924,08519,668Postpaid4,88014,75713,42711,779Prepaid3,1209,73210,6587,889Source: Companies.Sources cited by the UK's Sunday Times newspaper (subscription required) claim Hutchison could pay up to £9 billion (US$13.65 billion) for O2, about 6.4 times what the Telefónica SA (NYSE: TEF) subsidiary made in operating income before depreciation and amortization in 2013 (it has yet to report 2014 results).If confirmed, the move would not be entirely unexpected. Hutchison is keen to bolster its presence in Europe and has been linked with a bid for Telefónica ever since UK fixed-line incumbent BT Group plc (NYSE: BT; London: BTA) offered £12.5 billion for EE in December 2014. (See Could Li Ka-Shing Crash BT's M&A Party?, Li Ka-shing in the Hunt for EU Telcos, BT Offers $19.5B to Buy EE and Why BT + EE Makes More Sense.)BT has recently been looking to re-enter a mobile market it quit in 2001, when it spun off its Cellnet mobile operation as part of a financial restructuring process. (That operation became O2, which Telefónica acquired in 2005.) As part of its move back into the mobile services sector, BT picked up 4G spectrum in early 2013, during the government's most recent frequency auction, but a takeover of EE would give it immediate control of what is currently the UK's biggest mobile services business. (See Euronews: BT's Back in Wireless.)The prospect of the UK's fixed-line incumbent extending its market power into the mobile sector appears to have galvanized other players to respond. Rumors have recently been circulating, for instance, that Vodafone UK may be interested in bidding for Sky , which dominates the UK's pay-TV market and operates its second-biggest broadband business, behind BT but ahead of cable operator Virgin Media Inc. (Nasdaq: VMED).Even so, while a merger with O2 would see 3 overtake EE to become the mobile market leader, it would not offer the company a route into the market for quad-play services, which looks set to become a future battleground for UK service providers. (See Convergence: All the Rage in 2015.)O2 sold its fixed broadband business to Sky in March 2013 and had just 17,800 fixed broadband customers (courtesy of a deal with BT Wholesale) on its books in September 2014.Despite that, such consolidation would surely increase the pressure on Vodafone UK to look at inorganic ways of addressing its network shortcomings. Despite recently talking up its 4G capabilities, Vodafone appears to lag its rivals on 4G customer numbers and would find itself the smallest network operator in a three-player market if a merger between 3 and O2 took place. (See Vodafone UK Downplays 4G Need for Speed.)Like 3 and O2, it would also lack much of a fixed-line presence. Vodafone had 62,000 fixed broadband customers in September 2014 -- more than O2 but far fewer than BT (7.5 million), Sky (5.3 million), Virgin Media (4.5 million) and TalkTalk (3.7 million).For all the latest news from the wireless networking and services sector, check out our dedicated mobile content channel here on Light Reading.Merger talks between 3 and O2 are bound to be a further headache for regulatory authority Ofcom , which may already be feeling anxious about the possibility of a tie-up between BT and EE.Before the merger between Orange UK and T-Mobile UK that brought EE into existence, the UK had five mobile network operators and was regarded as one of the most competitive mobile markets in Europe. The sale of O2 to Hutchison would leave it with just three players, none of which would be likely to play the disruptive role that 3 has assumed during the past few years.That said, a merger between 3 and O2 could help to alleviate some worry about the distribution of spectrum among UK players following a BT takeover of EE -- which would otherwise put the fixed-line incumbent in a very dominant position -- even if it did leave Vodafone looking relatively weak from a frequency perspective.800MHz900MHz1800MHz2.1GHz2.1GHz unpaired2.6GHz2.6GHz unpaired3/O22x15MHz2x17.4MHz2x20.8MHz2x24.9MHz10.1MHz--BT/EE2x5MHz-2x45MHz2x20MHz10MHz2x50MHz-Vodafone UK2x10MHz2x17.4MHz2x5.8MHz2x14.8MHz-2x20MHz25MHzSource: European Communications Office, companies, Light Reading.Ofcom seems unlikely to agree to the BT and Hutchison deals without at least requiring them to make concessions aimed at improving the position of mobile virtual network operators.The network-sharing ventures that have taken shape in recent years might also need to be unraveled. Mobile Broadband Network Limited (MBNL) has seen EE partner with 3 on the deployment of 3G infrastructure, while O2 and Vodafone have teamed up through their Cornerstone Telecommunications Infrastructure business. For obvious reasons, neither venture would look feasible in the aftermath of the mooted consolidation.Hutchison has already shown it is prepared to spend heavily to strengthen its position in European mobile markets. In January 2013, the company completed a $1.7 billion takeover of Orange Austria, helping its Austrian unit compete more effectively against Telekom Austria and T-Mobile Austria, and in June 2013 it paid $1 billion for Telefónica's O2 business in Ireland. (See Three to Acquire O2 Ireland.)Telefónica, meanwhile, has been selling assets in markets it deems to be non-critical, both to pay off debts and raise funding for investments in Spain and Latin America. Besides exiting Ireland, it also sold a controlling stake in its Czech subsidiary to PPF, an investment group, in late 2013. (See Eurobites: O2 Czech Republic May Hive Off Networks.)— Iain Morris,  , News Editor, Light Reading

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About the Author(s)

Iain Morris

International Editor, Light Reading

Iain Morris joined Light Reading as News Editor at the start of 2015 -- and we mean, right at the start. His friends and family were still singing Auld Lang Syne as Iain started sourcing New Year's Eve UK mobile network congestion statistics. Prior to boosting Light Reading's UK-based editorial team numbers (he is based in London, south of the river), Iain was a successful freelance writer and editor who had been covering the telecoms sector for the past 15 years. His work has appeared in publications including The Economist (classy!) and The Observer, besides a variety of trade and business journals. He was previously the lead telecoms analyst for the Economist Intelligence Unit, and before that worked as a features editor at Telecommunications magazine. Iain started out in telecoms as an editor at consulting and market-research company Analysys (now Analysys Mason).

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