Three set to buy O2 for £10 billion in cash

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UPDATE: Hutchison Whampoa and Telefónica have both issued statements, confirming that they are in exclusive negotiations to potentially acquire O2.

HWL in Exclusive Negotiations with Telefónica to Potentially Acquire O2 UK

Hutchison Whampoa Limited (HWL), parent company of UK telecom operator Three UK, announced that it has entered into exclusive negotiations with Telefónica, S.A. over a period of several weeks for the potential acquisition of Telefónica, S.A.’s UK subsidiary, O2 UK, for an indicative price in cash of £9.25 billion which would be paid at closing, and deferred upside interest sharing payments of up to a further £1 billion in the aggregate payable after the cumulative cash flow of the combined businesses of Hutchison 3G UK Limited and O2 UK has reached an agreed threshold.  The timing and amounts of these payments will depend on the actual cash flows of the combined businesses.

The transaction remains subject to satisfactory due diligence over O2 UK, agreement on terms and signing of definitive agreements, and obtaining required corporate and regulatory approvals.  The negotiations may or may not result in any transaction.

Three UK, a subsidiary of HWL is the UK’s fastest growing 3G network operator covering 98% of the UK population and is now rolling out 4G to its customers.  It has won awards for Mobile Broadband, Roaming and Customer Support as well as for Best Value.

 

Telefónica enters into exclusive negotiations with Hutchison Whampoa to sell O2 UK for £10.25 billion

This announcement marks a key milestone in Telefónica’s process of strategtic transformation to accelerate sustainable long term growth.

Telefónica has entered into an exclusivity agreement with Hutchison Whampoa in relation to Hutchison’s potential acquisition of O2 UK, Telefónica’s subsidiary in the United Kingdom, for £10.25bn in cash (approximately €13.5bn).

The agreement includes an initial amount of £9.25bn (approximately €12.2bn) which would be paid at closing of the transaction and an additional  deferred payment of £1.0bn (approximately €1.3bn). The exclusivity period will last several weeks, allowing Telefónica and Hutchison Whampoa Group to negotiate definitive agreements, while the necessary due diligence process on O2 UK is completed.

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.

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Mobile network Three is reportedly set to acquire its rival O2 for more than £10bn in cash.

Hong Kong tycoon Li Ka-shing is set to become one of the biggest foreign investors in the UK when his Hutchison Whampoa conglomerate acquires the O2 network from its Spanish owner Telefónica. Both parties declined to comment, but an announcement is expected on Friday morning.

The merger will catapult Hutchison from Britain’s smallest network operator to its largest. Three’s 7.5 million customer base will swell to 31.5 million and the number of mobile network owners in the UK will fall from four to three.

Experts have warned that prices could rise. As the challenger brand, Three’s strategy has been to keep larger rivals on their toes by undercutting their offers, for example with unlimited mobile data packages. But this deal takes Three from underdog to top dog, price comparison site uSwitch said this week, warning:

“A lack of competition due to its merger could mean it can get away with cutting back on those tempting packages.”

Three launched on 3 March 2003 offering a patchy 3G mobile internet service from what rivals claimed was just a few dozen masts. Now it will command a 41% market share. Its nearest rival EE will have 32%, while Vodafone will have just 24%.

Sky, which had also been in talks to acquire O2, is now out of the running, with Hutchison entering a period of exclusive negotiations with Telefónica.

The announcement will crown a period of frantic dealmaking for the sprawling business empire which is still tightly controlled by 86-year-old Li, who is reputed to be the richest person in Asia with a net worth of $32bn (£21bn).

He has been snapping up mobile networks around Europe, recently acquiring Orange in Austria and O2 in Ireland. The deal puts a question mark over the O2 brand in the UK. In Ireland, the network has been rebranded Three, but in that market O2 was the smaller partner.

Telefónica acquired O2 in 2006 for nearly £18bn, in a deal which included networks not only in the UK but Ireland, Germany and the Czech Republic. But the global economic crisis has seen Spain’s former national telecoms network retrench to focus on its home market, Latin America and Germany.

Telefónica turned to Hutchison after losing a reverse auction in which it competed with EE to sell itself to BT. BT has redrawn the telecoms map by jumping back into mobile in December after agreeing to pay £12.5bn for EE. The merger will see BT begin offering bundled packages of broadband, landline, mobile and pay TV, known in the industry as “quadplay”. These bundled services, also on offer from TalkTalk and Virgin Media, may initially offer savings in order to attract subscribers, countering any rise in mobile prices.

Three’s merger with O2 is likely to be scrutinised by Brussels rather than a UK regulator such as telecoms watchdog Ofcom, because the majority of Hutchison’s revenues are outside Britain. Concessions similar to those required in Ireland would include selling affordable airtime to virtual mobile networks like those operated by Tesco Mobile and Virgin Media.

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