Telefónica has agreed to sell its O2 business in the UK to Hutchison Whampoa, the owner of rival network operator 3, in a £10.25 billion ($15.2 billion) deal that will create the UK's biggest mobile-phone business.
Following earlier speculation that the two companies were close to a deal, Telefónica UK confirmed in a statement late Tuesday that a "definitive agreement" had been reached following several weeks of due diligence. (See Eurobites: Hutchison's O2 Deal Poised for Take-Off.)
Under the terms of the agreement, Hong Kong's Hutchison Whampoa Ltd. (Hong Kong: 0013; Pink Sheets: HUWHY) -- which first announced its offer for Telefónica UK Ltd. in January -- will make an initial payment of £9.25 billion ($13.7 billion) to Spain's Telefónica. That will be followed by another payment of £1 billion ($1.5 billion) once the cash flow of the combined company reaches a certain threshold. (See Hutchison Offers $13.9B for UK's O2.)
Telefónica said it would use a substantial part of the proceeds to reduce its debts to about 2.35 times OIBDA (operating income before depreciation and amortization) from a ratio of 2.52 in December 2014. (See Telefónica Upbeat Despite Slump in Profits.)
The Spanish incumbent has already sold businesses in the Czech Republic and Ireland in the last couple of years as it looks to focus on its core markets of Spain, Brazil and Germany.
Hutchison, meanwhile, seems eager to play a much bigger role in the European telecom market. Besides purchasing Telefónica's Irish business last year, it also snapped up Orange Austria Telecommunication GmbH. in early 2013 and is currently in discussions with Italy's Wind Hellas Telecommunications S.A. about a possible merger with 3 Italia . (See Hutchison's Wind of Change.)
A UK merger between 3 and O2 would serve about 32 million customers, putting it ahead of EE , the current market leader, and leaving Vodafone UK as the smallest network operator in a three-player sector.
For that reason, however, it could yet run into opposition from UK competition authorities, who may be especially worried about the disappearance of 3 as a small and disruptive challenger forcing bigger rivals to remain on their toes.
Indeed, authorities already have their hands full thanks to an earlier deal that saw BT Group plc (NYSE: BT; London: BTA), the UK's fixed-line incumbent, agree to pay £12.5 billion ($18.6 billion) for EE. (See BT Locks Down £12.5B EE Takeover Deal.)
Although that particular agreement would not reduce the number of mobile players in the market, it has already met with a storm of protest from other fixed and mobile operators, which fear BT will become even more dominant once it controls the country's biggest 4G operator.
Vodafone Group plc (NYSE: VOD) CEO Vittorio Colao has suggested that Openreach, BT's networks division, should be separated from the rest of the BT Group, while CityFibre -- a much smaller operator investing in fiber networks -- has also complained that a tie-up between BT and EE will damage competition. (See BT & EE Spur UK Sector Shake-Up and CityFibre Sees Backhaul Interest From O2, Vodafone.)
One potential problem for a combined 3 and O2 could be the lack of a fixed-line offering if BT and EE begin to sell bundles of fixed and mobile services to their customers. 3 has previously said it does not believe quad-play will hold much appeal for UK consumers, but services have proven popular in other parts of Europe. (See Convergence: All the Rage in 2015.)
In its statement, O2 said it expected regulatory approvals to take up to a year. The companies have yet to indicate what their merger means for the O2 brand, although Hutchison has stopped using this in Ireland.
Telefónica's share price was trading up 0.75% in New York by mid-afternoon on March 24, when this article was published.
— Iain Morris, , News Editor, Light Reading