Hutchison Offers $13.9B for UK's O2

Hong Kong's Hutchison Whampoa has offered £9.25 billion ($13.9 billion) to buy UK operator O2 and create the country's biggest mobile-phone business.

Hutchison Whampoa Ltd. (Hong Kong: 0013; Pink Sheets: HUWHY) already owns Three UK , the smallest of the UK's four mobile network operators, but a merger with number two player Telefónica UK Ltd. , which uses the O2 brand, would propel it past market leader EE and Vodafone UK , giving it more than 32 million customers, or about 47% of the entire market.

Hutchison says it is now in exclusive negotiations with Spain's Telefónica SA (NYSE: TEF), which has been selling European assets to pay off its hefty debts and raise cash for investment in Spain and Latin America.

The offer also includes up to £1 billion in "interest sharing payments" if the merged entity hits undisclosed cash flow targets.

According to a report from Reuters, citing Hutchison finance director Frank Sixt, the Hong Kong firm plans to fund the transaction through a £6 billion ($8.9 billion) bank loan and could also offer up to 30% of the combined company to private equity partners.

Hutchison, which is in acquisitive mood, appears to have been eyeing a move for O2 ever since UK fixed-line incumbent BT Group plc (NYSE: BT; London: BTA) made its own £12.5 billion ($18.7 billion) offer for EE in December. (See Hutchison in Talks to Buy UK's O2 – Report, Could Li Ka-Shing Crash BT's M&A Party?, BT Offers $19.5B to Buy EE, Why BT + EE Makes More Sense and Li Ka-shing in the Hunt for EU Telcos.)

The prospect of that particular tie-up, which would give rise to a giant in the UK's fixed and mobile markets, has spurred rivals to look at their own M&A options. Broadband operators Sky , TalkTalk and Virgin Media Inc. (Nasdaq: VMED) have also been linked to a possible O2 acquisition, while Vodafone is said to have shown interest in buying Sky. (See Sky Opens Tie-Up Talks With O2 – Report and Eurobites: Ericsson Lands Nordics Services Deal.)

Such consolidation could see the emergence of several players operating both fixed and mobile networks and able to provide the whole spectrum of telecom services to customers in one "quad-play" package. (See Convergence: All the Rage in 2015.)

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While a merger between 3 and O2 would produce a new mobile market leader, it would lack any real fixed-line presence -- O2 sold its broadband business to Sky in March 2013 -- and could look exposed if quad-play demand takes off.

Even so, many are skeptical that consumers want to see mobile services bundled with fixed voice, broadband and TV, and operators have also expressed concern that discounts associated with further bundling could dilute customer spending.

Hutchison's Sixt is reportedly optimistic that regulatory authorities would bless the deal based on experiences in other parts of Europe. In January 2013, Hutchison strengthened its Austrian unit with a $1.7 billion takeover of Orange Austria Telecommunication GmbH. , while in June 2013 it spent $1 billion to acquire Telefónica's O2 business in Ireland. Last year, regulators also signed off on the merger between Telefónica's German subsidiary and E-Plus Service GmbH & Co. KG . (See Three to Acquire O2 Ireland.)

Nevertheless, with two possible mega-mergers in the making, UK authorities may have cause for concern. As a small, disruptive player, 3 has been seen as a thorn in the side of the bigger mobile operators, forcing them to keep a lid on pricing.

UK regulator Ofcom might look to follow the example of the German Bundesnetzagentur, which made Telefónica and E-Plus agree to provide network capacity to a mobile virtual network operator before giving the green light to their merger. (See Eurobites: Telefónica Gets EC Green Light on E-Plus Deal.)

News of Hutchison's offer will immediately increase the pressure on Vodafone. Should both the BT/EE and 3/O2 mergers secure regulatory and shareholder approval, the Newbury-based business faces the prospect of becoming the weakest mobile operator in its domestic market.

— Iain Morris, , News Editor, Light Reading