Spain's Telefónica is considering fresh options for the disposal of its UK business amid growing concern that European authorities are about to block the £10.25 billion ($14.75 billion) sale of the network to Hong Kong's Hutchison Whampoa, according to a report from Bloomberg. (See Eurobites: O2/3 Deal Facing EU Veto.)
According to sources familiar with the matter, those options include finding another buyer, which could include a private equity player or Liberty Global Inc. (Nasdaq: LBTY), the owner of UK cable operator Virgin Media Inc. (Nasdaq: VMED).
An alternative might entail spinning off Telefónica UK Ltd. , which trades under the O2 brand, as a publicly listed company. The Spanish incumbent is also said to be advancing plans to spin off Telxius, a tower company it set up earlier this year, although the Bloomberg report indicates such a move would be unlikely to fetch more than $4 billion.
Telefónica is under mounting pressure to slash debts, which spiraled out of control as the operator sought to expand its telecom empire while maintaining dividend payments to shareholders.
Hutchison Whampoa Ltd. (Hong Kong: 0013; Pink Sheets: HUWHY) plans to merge O2 with Three UK , the smallest of the UK's four mobile network operators, to create a new market leader, but the deal is heading for the rocks, according to various press reports, because of regulatory concern about the impact it would have on competition. (See Eurobites: Merger of O2 & 3 Is a Bad Idea, UK Tells EC, Eurobites: O2 & 3 May Not Become One and Orange & Hutch: A Tale of Two Takeovers.)
A merger between O2 and 3 would leave the UK with just three mobile networks, including the new-look entity, current market leader EE -- now owned by fixed-line incumbent BT Group plc (NYSE: BT; London: BTA) -- and number-three player Vodafone UK .
The UK's Competition and Markets Authority and national regulatory authority Ofcom have both spoken out against a tie-up between O2 and 3 in recent weeks, expressing their own concerns about the impact it would have on competition in the UK market.
But others have argued the deal is needed to provide a counterweight to BT, which has emerged as the UK's biggest provider of both fixed and mobile services following its £12.5 billion ($18 billion) takeover of EE earlier this year. (See BT Restructures, Boasts Best Quarter in 7 Years.)
Linked with a possible move for O2, Liberty Global refused to provide a comment to Bloomberg, but the cable operator has previously held talks with Vodafone about an exchange of European assets aimed at bolstering its mobile phone capabilities.
Earlier this year it agreed to merge its Dutch operations with those of Vodafone in a challenge to incumbent operator KPN Telecom NV (NYSE: KPN) in the market for both fixed and mobile services. That deal followed Liberty's acquisition of KPN's mobile business in neighboring Belgium last year. (See Vodafone, Liberty Global Form Dutch JV and Telenet Buys KPN's BASE in $1.4B Deal.)
As reported in its last earnings report for the 2015 financial year, Telefónica's net debt had ballooned to nearly three times operating income before depreciation and amortization (OIBDA) at the end of December -- way in excess of a target ratio of 2.35.
Including the O2 deal, the net-debt-to-OIBDA ratio would have stood at 2.38 in December.
— Iain Morris, , News Editor, Light Reading