Mobile Operator Three UK Hints Towards Interest in O2 Acquisition

The boss of mobile operator Three UK, David Dyson, has added fuel to the growing fire of rumours that surround their alleged interest in a merger with O2 by saying that “under the right circumstances” the United Kingdom could operate competitively with fewer operators. But there are significant complications to consider.

So far it’s not been a great year for O2 UK, which has had to sell their fixed line home broadband and phone business to BSkyB (Sky Broadband) and re-focus on the expensive roll-out of 4G (LTE) based Mobile Broadband services. Meanwhile O2’s parent company, Telefonica, is still struggling to deal with debt and last month CCS Insight predicted that it might tackle this by taking advantage of “favourable regulatory conditions” in the EU to sell its UK mobile business.

At the same time Three’s European operations, which have the backing of a powerful Chinese conglomerate in the form of Hutchison Whampoa, have been throwing money around like there’s no tomorrow in an effort to boost growth by acquiring O2 Ireland and Orange in Austria. Three UK alone might not have enough cash to grab a prize as big as O2 (they’re roughly a quarter of the size) but that’s clearly less of a concern for Three’s parent.

David Dyson, CEO of Three UK, said (The Guardian):

“We are three years into a five-year plan to double our customer base from five million to 10 million. If we can deliver on that plan maybe that makes us more interesting as a target or puts us in a position where we can do something as an acquirer.”

Dyson, whom originally opposed the T-Mobile and Orange (now EE) merger and has always argued alongside Ofcom for a market that supports at least four primary operators, seems to be changing his tune. But he also admitted to keeping a close eye on a similar situation in Germany where Telefonica’s O2 brand is seeking permission to merge with E-Plus and thus reduce the number of primary Mobile Network Operator’s from four to three.

However EU regulation would not be the only hurdle for such a merger and indeed there are some complicated network sharing arrangements to consider. At present Three UK have a 50/50 network sharing deal through the umbrella organisation Mobile-Broadband Network Limited (MBNL). Meanwhile O2 and Vodafone have a similar arrangement and the complications of bridging those two deals would be no small task.

The issue of spectrum ownership could also become a problem with both Three UK and O2 already owning a good slice of 2100MHz and smaller slices of 1800MHz and 800MHz. The end result of any merger would turn Vodafone into the markets smallest operator and they might not be happy about that.