UK satellite TV giant Sky is reported to have opened talks with Telefónica about an alliance with the Spanish operator's UK mobile business, known as O2.
Citing two sources familiar with the matter, the UK's Financial Times reports that Sky has been in discussions with Telefónica SA (NYSE: TEF) since late 2014 about developing a partnership that would combine its broadband and pay-TV activities with Telefónica UK Ltd. 's mobile phone outfit, which trades under the O2 brand.
The development marks the latest twist in a story that began with BT Group plc (NYSE: BT; London: BTA)'s audacious £12.5 billion ($19 billion) bid for mobile operator EE in December 2014. (See BT Offers $19.5B to Buy EE and Why BT + EE Makes More Sense.)
The move by the UK's fixed-line incumbent would create a leading player in both the fixed and mobile markets, and it appears to have lit a fire under the country's communications sector, spurring rival operators to weigh their own M&A options. (See Convergence: All the Rage in 2015.)
On Sunday, Hong Kong's Hutchison Whampoa Ltd. (Hong Kong: 0013; Pink Sheets: HUWHY) -- which owns Three UK , the UK's smallest mobile network operator -- was reported by the Sunday Times newspaper to have begun its own talks with Telefónica about a takeover of O2 that could potentially raise £9 billion ($13.7 billion) and produce the country's biggest mobile operator by customer numbers. (See Hutchison in Talks to Buy UK's O2 – Report, Could Li Ka-Shing Crash BT's M&A Party? and Li Ka-shing in the Hunt for EU Telcos.)
According to the latest report from the Financial Times, however, Hutchison approached Telefónica in the run-up to Christmas and talks have not progressed since then.
Sky, meanwhile, appears to be in no position to countenance further M&A. As it acknowledged in its latest earnings announcement, proposed takeovers of Sky Italia and a majority stake in Sky Deutschland Fernsehen GmbH & Co. KG could drive net debt up to an eye-watering £5.3 billion ($8.1 billion), more than 3.1 times what it generated in earnings before interest, taxation, depreciation and amortization in its last financial year.
Instead, the broadcaster looks keen on some kind of alliance with O2 that would allow it to offer mobile services on the O2 network as a mobile virtual network operator (MVNO).
Such a deal would resemble the one Virgin Media Inc. (Nasdaq: VMED) already has with EE, allowing it to serve consumers who want to buy all their communications services in one quad-play package.
By launching a quad-play offering of its own, Sky would lessen the risk of customers defecting to its main pay-TV rival simply to add mobile services to their bundles. It would also be in a better position to fend off a quad-play assault from BT following a takeover of EE.
All of this sounds like a rejection for Vodafone UK , which operates the UK's third-biggest mobile network and already has a partnership in place with Sky courtesy of its Sky Sports content offering to 4G customers. In late 2014, Sky was even thought to be considering an MVNO launch on Vodafone's network.
Moreover, while Hutchison has previously been linked with a bid for O2, Vodafone has been seen as a prospective suitor for Sky. After all, the mobile operator spent much of 2013 and 2014 on the acquisition trail, snapping up major broadband assets in Germany and Spain, and a takeover of the UK's second-biggest broadband operator and leading pay-TV player would hold obvious appeal given Vodafone's converged-services ambitions. (See Vodafone UK Downplays 4G Need for Speed and ONO Says Yes to Vodafone.)
Ultimately, it seems, the UK's various players feel they need both fixed and mobile capabilities to prosper, and a deal between Sky and O2 would clearly help each company to address that need.
— Iain Morris, , News Editor, Light Reading