Confirmed – Three UK Enters Exclusive Talks to Buy O2 for £10.25bn

The Spanish owner of mobile network operator O2 UK, Telefonica, has confirmed that they’ve entered into an “exclusivity agreement” with Hutchison Whampoa (the parent of rival mobile operator Three UK) to buy the provider for £10.25bn in cash. Unless the talks fail, which at this stage seems unlikely, then Three UK will ultimately end up merging with O2.

Until recently Three UK’s parent had expressed an interest in buying either EE or O2 in the United Kingdom, although BT took the option of EE off the table just before Christmas (here) and that left O2 as the only option. In fact many had predicted that O2 would sell for less (i.e. £8bn to £9bn), but it looks as if Telefonica extracted a good price. Telefonica itself has been struggling with debts and wishes to focus more on its home market in Spain.

The agreement includes an initial amount of £9.25bn, which would be paid at closing of the transaction, and an additional deferred payment of £1.0bn. The exclusivity period will last several weeks, allowing Telefonica and Hutchison Whampoa Group to negotiate definitive agreements, while the necessary due diligence process on O2 UK is completed.

Telefonica Statement

“This operation marks another step in Telefónica’s transformation process, initiated by the Company to become a leading digital telco and accelerate sustainable long term growth while maintaining an attractive remuneration policy.

Additionally, this announcement occurs at a decisive moment for Telefónica, following a period during which the company has been proactively managing its portfolio of assets, significantly reinforcing its position in key markets (consolidating Germany, acquiring GVT in Brazil -pending regulatory approvals- or undertaking a commercial and technological revolution in Spain) and therefore increasing its potential for future growth.

Finally, today’s agreement shows that Telefónica continues to lead the European consolidation process and it will allow the company to strengthen its financial flexibility.”

A deal between Three UK and O2 is likely to attract less regulatory concern than the one between BT and EE, which is largely due to Three UK’s limited scale and spectrum ownership in the United Kingdom. Similarly BT’s move to buy EE may actually help Three UK’s chances of passing regulatory scrutiny and vice versa, since the regulator would see a single operator under BT as being less dominant if its rivals are also perceived to be strong.

But none of this means to say that the process won’t still suffer from complications, not least because Three UK already has a major network sharing agreement with EE through the umbrella organisation Mobile-Broadband Network Limited (MBNL). Meanwhile O2 has a similar deal with Vodafone.

On top of that the wider market appears to be moving increasingly towards bundles and convergence, yet O2 UK abandoned its fixed line consumer broadband and phone interest to Sky Broadband in 2013 and Three UK is similarly mobile-only.

On the other hand Three UK and O2, which we should perhaps call ThreeO2 or just “Throat” because it sounds better :), might equally be able to take advantage of their unique position in the market as fixed line broadband ISPs would not see them as a direct threat and may be more inclined to buy virtual mobile (MVNO) solutions from them (e.g. Sky Broadband.. perhaps). Assuming they don’t also announce their own fixed line business of course, but that would require an agreement with somebody else.

Finally there’s the big question of what customers will think? Right now the United Kingdom’s mobile market is in the biggest single state of flux that we’ve ever seen and as a result the end picture remains somewhat unclear. Customers unhappy with today’s deal will be left with fewer choices, a move to the consumer complaints riddled combo of BT owned EE (assuming that completes) or switch to Vodafone. At least two options is better than one or none.

Equally there’s the question of how Three UK’s more low-cost orientated nature will play into future products and whether the brands will both be retained or merged under a single name. On top of all that neither Three UK nor O2 have their own fixed line business, which isn’t just a matter of consumer products but is also useful for supplying network capacity. Both BT/EE and Vodafone already have this and that’s a major advantage in their corners.