UPDATE Three UK Finalises Deal to Buy O2 from Telefonica for £10.25bn

The parent company of mobile operator Three UK, Hutchison Whampoa, has confirmed that they’ve finally reached a “definitive agreement” to buy O2 UK from debt-laden Telefonica for the previously touted price of £10.25 Billion (cash). But we’re still not sure where the long-term advantage can be found.

The announcement follows a two-month long period of negotiation after both operators initially announced that they had entered into an “exclusivity agreement” (here), which meant that Telefonica had accepted a preliminary offer and thus Hutchison Whampoa needed to check through their books in order to ensure that there were no nasty surprises.

It’s known that Three UK’s parent had initially been interested in gobbling EE, but all that changed when BT made the first move and secured a deal. Never the less today’s agreement should create the United Kingdom’s largest mobile operator, with around 34 million customers (41% market share, well above EE’s 29%), and that will also reduce the number of primary Mobile Network Operators (MNO) from four to three, which is sure to attract some regulatory scrutiny.

Telefonica Statement

Hutchison Whampoa has today agreed definitive terms to acquire O2 in the UK from Telefónica. The deal agreed is the result of a period of exclusive discussions between the two companies. Closing of the deal is subject to regulatory approvals, but would bring together two respected mobile businesses in the UK.

O2’s vision has always been to provide the very best customer experience. This deal will – subject to merger clearance – result in the creation of the most customer-centric mobile operator in the UK. We are pleased to be integral to such an exciting ambition and are confident that as a result of the deal, UK customers will benefit from greater value, quality and innovation. We also fully expect that new and exciting opportunities will open up for employees of both businesses.

The deal is subject to regulatory approvals which might take up to a year. In the meantime, our priority is to continue to look after our customers, delivering the very best experience that they have come to expect from O2.

The big question now, assuming the deal passes through a review by the UK and European competition / regulatory authorities unscathed (Ofcom are not a fan of seeing fewer operators), is what comes next?

The wider market, which at present is being led by BT’s move to gobble EE, is clearly galloping towards convergence and quad-play bundles of home broadband, phone, TV and mobile. But O2 sold their declining fixed line broadband and phone network to Sky Broadband in 2013 and Three UK is also a mobile-only operator, which limits their options.

On top of that there’s the increasingly complex web of Network Sharing and Mobile Virtual Network Operator (MVNO) deals to consider, with both TalkTalk and Sky Broadband having signed MVNO deals with O2.

The MVNO deals aren’t likely to be much of a concern due to O2/Three UK’s (aka – Throat, as we like to call them) lack of a fixed line business, although O2 also has a network sharing agreement with Vodafone and Three UK has one with EE. Somewhere along the lines a difficult decision will have to be taken because that situation may soon start to look untenable.

Meanwhile Three UK’s customers will be hoping that the operators low-cost and data centric approach isn’t sacrificed, while O2 users will be wary of any potential quality loss to the now more budget conscious owner. Both operators also have fairly recognisable brands, but Hutchison Whampoa may well wish to move them under a single umbrella.

In any case we’ll have to wait and see how everything turns out, although it could a year before everything is completed (the same as with BT’s purchase of EE) and that’s assuming the competition authorities don’t raise concerns.

UPDATE 25th March 2015

A comment from CityFibre.

Mark Collins, Director of Strategy at CityFibre, told ISPreview.co.uk:

“CityFibre welcomes the merger of O2 and Three, especially in light of the recent acquisition of EE by BT – it is in the market’s interest that a formidable competitor should arise. Consolidation is the only way to combat BT’s ever-growing monopoly over both the retail and wholesale telecoms sectors. It is essential that a combined Three/O2 must have its own mobile fibre backhaul infrastructure network, independent of BT.

Mobile operators in the UK are clearly demonstrating their appetite for independent, alternative infrastructure – as highlighted by the recent national framework agreement signed between CityFibre, Three and EE last year. Hull a city long in need of supplier diversity and the first city where our framework agreement has been implemented, is already seeing 62km of alternative network infrastructure being installed. CityFibre can do the same for the rest of the UK, significantly boosting the economy in the process, if an environment where investors have confidence to continue investing is maintained.”