Telefónica Swoops In on O2

In the latest example of European incumbents buying up mobile operations abroad, Spain's Telefónica SA has made an offer for O2 plc (NYSE/London: OOM) of £17.7 billion ($31.4 billion) in cash. (See Telefónica Acquires O2.)

At £2 ($3.55) per share, that puts the deal at a 22 percent premium over O2's share price at close of business on Friday. Shares in the operator rose by 40.25 pence (71.4 cents), 24.51 percent, to 204.50 pence (362.78 cents) in mid-morning trading on the London Stock Exchange. Telefónica shares had been suspended for the announcement, and fell by 2.8 percent to €13.24 ($15.97) when they resumed trading this afternoon.

In a conference call with analysts, Telefónica's executive chairman Cesar Alierta laid out the benefits of the deal: "First it accelerates further Telefónica's already beneficial growth prospects, widening the gap with our peers. Second it improves Telefónica's scale and generates tangible synergies; we are entering in the two largest markets in Europe. And third, it rebalances our exposure by business and region."

The companies will have a joint customer base of 116 million mobile subscribers, making Telefónica one of the largest and fastest-growing operators in Europe.

"We believe that scale and not just size is becoming increasingly important in the telecom sector," said Alierta, emphasizing the €3.3 billion (US $3.96 billion) in synergies Telefónica expects to gain. In that sense, the O2 buy fits in with the move by operators to "better serve their clients and serve them more efficiently," he said. "We ... are managing our operations to stress synergies across business regions and technologies [and so far] we are experiencing tangible scale benefits in our day-to-day operations."

It's a recurring theme as operators across Europe look to consolidate mobile operations with their fixed assets to improve operational efficiencies. (NYSE: FTE) recently acquired Spanish mobile operator Amena, which it plans to integrate with its fixed-line operations as part of its NeXT strategy. (See FT Takes on Telefónica and France Telecom Launches NExT.) Today, (Nasdaq: TELN) acquired Vodafone Group plc's (NYSE: VOD) Swedish operations for €1.04 billion ($1.25 billion). (See Vodafone Sells Swedish Unit.)

For its part, Telefónica acquired an 80% stake in Czech operator in April, which Alierta says has already achieved 25 percent of the value it expected to gain. (See Telefonica Buys Cesky Telecom.) It's worth noting that Telefónica, not its mobile arm Telefonica Móviles SA, is acquiring O2. "This transaction will increase our exposure to the high-growth mobile market," said Alierta.

The purchase will also help Telefónica gain more of a foothold in the European market after focusing much of its attention on acquisitions in Latin America. Alierta noted O2's 46 percent growth rate as "unique in the industry for an operator this size," and pointed to the German market as the fastest-growing in Europe. Telefonica left that market in 2002 with the failure of its Quam mobile joint venture with the former Sonera Oyj.

"For O2, it was something bound to happen. They were operating in a market with large players like Vodafone, France Telecom, and Deutsche Telekom -- they had become too small a fish, and sooner or later were to be eaten," writes Marta Muñoz Méndez-Villamil, senior analyst at Ovum-RHK Inc., in a research note. "Today's announcement comes as no surprise to us. O2 has had the "For Sale" tag for a long time, and this is not the first time that it has been approached by Telefónica, if the rumours are to be believed."

Méndez-Villamil adds that Telefónica could also learn a thing or two from its new unit: "O2 has managed to defend its position well whilst operating in highly-competitive environments. Something Telefónica could learn from, especially now that it faces increasing competition from Vodafone and Orange in its home market."

Analysts say there's good chance the offer will spark a bidding war with German incumbent Deutsche Telekom AG (NYSE: DT), which has shown interest in acquiring O2 in the past.

DT was last linked with O2 in August, when it was in talks with Dutch operator (NYSE: KPN) to make a joint bid. KPN would've taken the German operations and Deutsche Telekom could've combined O2 UK with its T-Mobile (UK) arm. Going further back, KPN itself was in discussions with O2 early last year. (See KPN Comments on mmO2.)

On the conference call with analysts, Alierta brushed off questions on whether Telefonica would fight a counter bid as "hypothetical." He added, "there are a number of matters we cannot comment on and this is one of them."

— Nicole Willing, Reporter, Light Reading

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