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 Hutchison already operates the Three Mobile network in Britain, and
buying second-ranked O2, which has about 22 million subscribers,
from the Spanish group will make it the top mobile operator in the
country.
The move comes only weeks after former state monopoly BT <BT.L>
entered exclusive talks with the owners of EE, Britain's biggest
mobile operator to create a dominant provider of fixed and mobile
phones and internet services. BT opted for EE rather than buying O2.
The deal is also the boldest bet yet for Asia's richest man, Li Ka-shing,
as he revamps his European telecoms business.
Having been in at the start of the mobile revolution in Britain in
the 1990s as the founder of Orange, Hutchison returned in 2003 with
the launch of its third generation Three network.
However, returns from the Three business, which operates in six
European countries, have lagged other parts of Li's
ports-to-property empire.
For Telefonica, the deal marks a key step in the reorganisation of
its business started two-and-a-half years ago and that has seen the
company shedding non-core operations to focus on its biggest markets
Spain, Brazil and Germany.
The Hutchison offer values O2 UK at about 7.5 times EBITDA, in line
with BT's planned 12.5 billion pound takeover of EE, which was
valued at about 8 times.
Analysts and investors welcomed the deal, which will consist in an
all-cash transaction of 9.25 billion pounds, with another 1 billion
pounds to be paid when the combined business reach certain cash flow
targets.
Hutchison shares rose 3 percent, outpacing a 1.3 percent rise in
Hong Kong's benchmark Hang Seng share index while Telefonica's
shares gained 2.8 percent in Madrid, also outperforming the 1.4
percent rise in the benchmark IBEX index.
MORE UK CONSOLIDATION
The marriage of Three Mobile and O2 UK may now trigger more
acquisitions or tie-ups in Britain, where the market is currently
split between four mobile network operators and four separately
owned fixed-line and broadband providers.
Pay TV company Sky and mobile operator Vodafone are seen as
potential partners. Vodafone would have access to Sky's content and
Sky could offer branded mobile services using Vodafone's network.
British regulator Ofcom, which has been keen to retain four national
players and designed its last airwaves auction to meet that end,
could force a combined Three and O2 to give up some airwaves, and
offer good terms for mobile virtual network operators to enhance
competition.
Hutchison, which bought Telefonica's Irish business last year, will
fund the deal with a 6 billion pound bank loan. The company is in
talks with private equity firms and others to bring in minority
partners, who would be offered not more than a 30 percent stake.
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The proposed O2 deal comes just two weeks after the Hong Kong tycoon
undertook a major overhaul of his sprawling operations, boosting its
acquisition firepower, which it could now use in Europe to snap up
businesses from operators who have been battered by the continent's
debt crisis.
Analysts expect Hutchison to consolidate its Italian operations
next. It operates businesses in Italy, Britain, Sweden, Denmark,
Austria and Ireland. In Asia, Hutchison has mobile operations in
Indonesia, Vietnam and Sri Lanka.
The operation could also pave the way for more corporate
restructuring at Telefonica, which will now be in a better financial
position to keep reorganising its business in Latin America, where
it hopes to achieve higher growth rates than in more mature European
markets.
The cash obtained from the sale of O2, which Telefonica bought in
2006 will help the Spanish group cut debt to around 35 billion euros
according to analysts' estimates and support one of the highest
dividend yields in the sector, at 5.7 percent.
Telefonica recently bought GVT in Brazil and is eyeing additional
acquisitions in the country. Analysts also expect the group to
bolster its Mexican operations.
In Europe, Telefonica is now focusing on the Spanish and German
markets, where it is investing massively in new mobile and fixed
networks that are consuming a lot of cash and eating in its margins.
UBS is advising Telefonica while Moelis and HSBC are advising
Hutchison. HSBC is also financing the deal.
(Additional reporting by Donny Kwok and Elzio Barreto in Hong Kong,
Kate Holton and Paul Sandle in London and Leila Abboud in Paris;
Editing by Lisa Shumaker, Alex Richardson and Keith Weir)
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