Mobile services

Brexit Batters Telefónica's O2 Sale Plans

Spain's Telefónica appears to have scrapped plans for a short-term sale of its O2-branded UK subsidiary in the wake of the country's momentous referendum on membership of the European Union (EU), which saw a narrow majority of voters opt for a British exit -- or Brexit. (See Brexit: It's Hard to See an Upside and 'Brexit' Vote Hits BT, Vodafone.)

The move is a worrying sign that Brexit is already starting to bite and comes amid concern that some of the UK's biggest employers, including Vodafone Group plc (NYSE: VOD) and several banks, are considering whether to relocate staff or headquarters in advance of an actual Brexit.

Telefónica had been trying to find another buyer for Telefónica UK Ltd. , which trades under the O2 brand, after competition concerns persuaded EU authorities to block a planned sale to Hong Kong's Hutchison Whampoa Ltd. (Hong Kong: 0013; Pink Sheets: HUWHY), which wanted to merge O2 with its Three UK subsidiary, the smallest of the UK's four mobile network operators.

In a regulatory filing published on Wednesday afternoon, however, Telefónica said it would no longer report its UK business as "discontinued operations" that are "held for sale."

"Telefónica continues to explore different strategic alternatives for O2 UK, to be implemented when market conditions are deemed appropriate," said the operator in that statement.

Press reports suggest that Telefónica officials held meetings immediately after the Brexit result became known to discuss options for O2 as well as the planned IPO of a stake in infrastructure business Telxius.

While the operator has not drawn a direct link between the outcome of the UK referendum and its decision to take O2 off the market, the timing of the move suggests that Brexit has dealt a further blow to its UK sale plans.

Business leaders and economists have warned that exiting the European single market will prompt investors to avoid the UK and could trigger a full-blown UK recession.

Vittorio Colao, the boss of O2 rival Vodafone, has already said he will consider relocating Vodafone's headquarters from the UK to another part of Europe if an actual Brexit comes with restrictions on the free movement of people -- as some of the most prominent "Leave" campaigners had demanded. Colao has also warned about the economic consequences for the UK of being locked out of the European market for emerging digital services.

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While stock markets have rallied since the post-referendum meltdown, and the pound has recovered some of the ground it lost against the dollar, the initial reaction proved that investors are nervous about the potential impact of Brexit on the UK economy.

Telefónica's own share price fell by 16% on June 24, the day on which the UK referendum result was announced, but has staged a partial recovery since then and was trading at €8.44 at the time of publication -- about 8% lower than on June 23. However, it is still about 18% lower than at the start of this year.

Telefónica had viewed a sale of O2 as a means of reducing its debts, which had risen to about three times its annual earnings (before interest, taxation, depreciation and amortization) in the January-to-March quarter.

After the EU blocked its £10.25 billion ($13.4 billion) deal with Hutchison Whampoa, Telefónica had been linked with a sale to companies including Apax Partners and CVC Capital, two private equity players, as well as Liberty Global Inc. (Nasdaq: LBTY), which owns UK cable company Virgin Media Inc. (Nasdaq: VMED). An IPO of O2 had also been on the cards. (See Telefónica Eyes Alternative Buyers for UK Biz – Report.)

This week's decision to retain O2 suggests Telefónica does not feel it can negotiate a satisfactory deal in the current circumstances.

Earlier this month, Liberty Global CEO Mike Fries was reported to have dropped hints that Brexit would spur his company to shift investments from the UK to other parts of Europe, although he said the move would not affect the Project Lightning network upgrade that is already underway.

— Iain Morris, Circle me on Google+ Follow me on TwitterVisit my LinkedIn profile, News Editor, Light Reading

mendyk 7/1/2016 | 11:21:31 AM
Re: Other side to this coin? From your report, neither the Liberty nor the PE options seem at hand. Unless O2 is costing Telefonica a lot of money -- and if that's the case, then buyers are going to know that and value the property accordingly -- maybe not making a move at this time is the better option.
iainmorris 6/30/2016 | 12:15:27 PM
Re: Other side to this coin? I think a sale to another operator without a major mobile presence could work because it wouldn't encounter the same regulatory opposition (see BT and EE). Analysts would welcome that kind of move for creating a counterbalance to BT, as well. Liberty Global is the prime candidate. Then there are private equity buyers, which seem to have been eyeing the business.
mendyk 6/30/2016 | 11:56:38 AM
Re: Other side to this coin? What are Telefonica's options then? I can't imagine it would just shut the business down. But it seems not to want the business. But it may not be able to sell the business to another operator. Is there a way out?
iainmorris 6/30/2016 | 11:15:57 AM
Re: Other side to this coin? It's possible, I guess. There is going to be a lot of uncertainty while the UK decides what it does next and - assuming Article 50 is invoked - tries to negotiate deals that will replace EU membership. That uncertainty is going to be very offputting for potential investors. You could certainly see things improving a few years from now - depending on what kinds of deal we get in place. But I think market consolidation of the 3-meets-O2 variety is going to be very problematic even after Brexit. The UK's Competition and Markets Authority was fully aligned with the EU on this issue, arguing that a merger should not be allowed. Unless there is a change in the UK position, Telefonica will struggle to execute a sale to another mobile operator.
mendyk 6/30/2016 | 9:44:02 AM
Other side to this coin? Any chance that the possible sale is being held back because in the longer term there could be a better deal post-Brexit (i.e., the sale to Hutchison Whampoa that was blocked by the EU)?
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