Hong Kong conglomerate Hutchison Whampoa, owner of 3 UK, the smallest mobile network operator in the UK, is said to be closing in on a £10.25 billion deal to land Telefonica-owned O2, the second largest mobile player.
Exclusive talks between Hutchison and Telefonica have been rumbling on since January, but various media reports – citing unnamed sources – said due diligence had not uncovered any major obstacle and that an announcement was imminent.
Such has been the speculation that Hutchison issued a statement today saying “exclusive negotiations” were still ongoing.
The deal on the table, as reported in January, was that Hutchison would pay Telefonica £9.25 billion in cash to take control of O2, and a further £1 billion in deferred payments when the combined business hits certain cash flow targets.
State-backed funds from China, Singapore and the Middle East, have reportedly been in discussions to pump “billions of pounds” into a merger of 3 UK and O2 in exchange for a stake of up to 30 per cent in the newly-created entity.
The prospect of a newly-emboldened BT, assuming it gets regulatory clearance to acquire EE – the largest mobile operator in the UK – is no doubt a factor in Hutchison and Telefonica seeking to pool their UK assets and become a stronger competitor.
Telefonica will also welcome the cash windfall to reduce its huge debt pile. Synergies, too, are on the cards. According to Enders Analysis, O2 and 3 are expected to save £250 million annually by only having to invest in one network.
Not that the tie-up is plain sailing, even if the financing is in place. The merger of 3 and O2 would create the largest mobile operator in the UK, and so alert anti-trust authorities.
In a move that might help convince competition watchdogs that a Hutchison Whampoa takeover of O2 is not a bad thing, satellite broadcaster Sky recently announced it would launch its own mobile network next year after signing a wholesale deal with Telefonica’s UK mobile subsidiary.
Sky’s entry into mobile is in anticipation of BT’s big-time return to the UK mobile consumer market via EE.