Hutchison Whampoa has confirmed speculation it is in exclusive talks with Telefonica to acquire O2 UK for £10.25 billion, a deal that would create the country’s largest mobile operator – but one without a significant fixed presence in a market driven by convergence strategies.
A deal between 3 and O2 in the UK is not expected to be finalised in the next few days, with parents Hutch and Telefonica stressing that the exclusivity period for the talks will last several weeks.
The deal would involve Hutch paying £9.25 billion in cash with a further £1 billion in deferred payments. As long as regulatory approval is forthcoming, the deal could close in mid-2016.
The Hong Kong conglomerate has previously signalled its interest in joining the current round of UK consolidation triggered by BT’s announcement in November that it was in talks with EE and O2.
O2 was left out last month when BT chose EE as a takeover target in a dramatic return to the UK mobile market. O2 owner Telefonica had made clear its interest in merging its UK unit with a rival.
While a combination of Hutchison’s 3 and O2 would leapfrog market leader EE, as well as Vodafone, in terms of overall mobile connections (with 3 jumping from a 11 per cent market share to a dominant 41 per cent, according to GSMA Intelligence numbers), neither 3 or O2 have exactly set the UK market alight with their 4G sales, an area comfortably led by EE. And the new entity would lack any significant fixed presence, in contrast to its rival.
“3 and O2 have looked vulnerable as [the] UK transitions to multi-play,” tweeted CCS Insight analyst Kester Mann. “But the new entity still faces the challenge of having no fixed-line assets.”
Mann also believes the deal would face “huge regulatory scrutiny” as it reduces the UK mobile market from four operators to three. There could be “major concern over potential price rises,” he warns.
IDC analyst John Delaney also raised a warning flag over 3’s existing network sharing arrangement with EE, suggesting that this will further complicate any attempts to merge 3 and O2.
For its part, an O2 UK spokesperson claimed a successful outcome to the talks would mutually benefit customers of both operators: “3 is known for campaigning on behalf of its customers, much like O2. We are confident that an agreement will drive better value, quality and investment in one of the most digitally competitive countries in the world.”