French Operator Illiad SA Considers Buying O2 if Three UK Merger Fails

The French telecoms provider Iliad SA, which owns mobile operator ‘Free Mobile’, is reportedly sniffing around O2 (Telefonica UK) and could make a play for the operator if the on-going merger plans with Three UK are dashed by the European Commission this week.

As most people know Three UK’s (CK Hutchison Holdings) hopes of securing a £10.25bn merger deal with rival mobile operator O2 (Telefonica) look set to be dashed after both the EC and Ofcom signalled that they were strongly positioned against an agreement. The final decision is expected this week or next, but it’s an uphill struggle that Hutchison may well lose.

The regulators don’t like the deal because it would reduce the number of primary Mobile Network Operators (MNO) in the UK from four to three, which they claim could result in less competition and higher prices. The deal would also trigger a complicated fight over existing network sharing agreements (i.e. Vodafone shares with O2 and Three UK shares with EE).

On the flip side BT’s increasingly dominant position in the UK market, which has been given a huge boost by the EE merger that went ahead without any major concessions, is worrying the other mobile operators and none more so than minnow Three UK. As such the merger with O2 could be one way to compete more effectively and customers might also benefit from improved network coverage, depending upon how the existing network sharing arrangements are managed.

However so far none of the concessions being offered by Hutchison (here) seem to have had the desired impact and the smart money is now on either a flat rejection of the proposed deal or one with such a huge concession attached that it would be fundamentally unworkable. Three UK has threatened to take legal action if this happens, but O2 may not wait to see the outcome.

Indeed Telefonica has a problem with debt and needs to offload O2 to somebody, ideally sooner rather than later. The Sunday Times (paywall) claims that O2 may end up being floated or sold and Illiad SA is understood to be interested. Mind you interest alone does not a deal make.