O2 in $15bn Hutchison talks

March 2015 | DEALFRONT | MERGERS & ACQUISITIONS

Financier Worldwide Magazine

Hutchison Whampoa Limited, the Hong Kong based parent company of UK mobile operator Three UK, announced in January that it was in advanced, exclusive talks with Spanish telecommunications firm Telefonica S.A. over the acquisition of Telefonica’s UK subsidiary O2 UK.

Should the deal be finalised, the transaction would see the combination of the country’s second and fourth largest networks within the Hutchison portfolio. Accordingly, the merger would catapult Hutchinson’s Three mobile from the smallest of the UK’s networks to the largest, easily overshadowing rival firms EE and Vodafone. Following the completion of the deal, which is expected to come in Q1 2015, Three’s 7.5 million customer base would expand to around 31.5 million.

However, the transaction is likely to face intense regulatory scrutiny going forward. Some commentators are not sure the deal will win the necessary regulatory consent, particularly given that Ofcom, the UK’s telecoms regulator, prefers a competitive four company market – a market which would be diminished by the completion of this deal. The telecoms industry in the UK has experienced considerable consolidation of late. Until recently, the UK mobile space had five major competitive players; however, the amalgamation of Orange and T-Mobile into EE brought the number down to four. The O2/Hutchinson deal quickly followed the announcement of the £12.5bn acquisition of EE by BT.

Despite Ofcom’s concerns over the Hutchison deal, the acquisition may well be ratified regardless. The final regulatory decision would actually lie with the European Union’s antitrust regulators, given that the majority of Hutchison’s revenues are generated outside of the UK. European regulators have recently approved a number of similar deals in other EU nations. Telefonica itself was party to a comparable deal in 2014, and the European Commission approved the Spanish firm’s £6.4bn acquisition of German mobile operator E-plus, which saw the German telecoms market shrink from four major operators down to two. Hutchison has also been an active acquirer in recent years; the Hong Kong based firm purchased Orange in Austria in 2012 for $1.7bn, and completed the purchase of Telefonica’s Irish O2 unit in July 2013 for around $1bn. Once that deal had been completed, Hutchison combined O2 with its Irish Three division.

To complete the deal for O2, UK Hutchison announced that it will be drawing a $9bn loan from HSBC Holdings PLC. Once the deal has been completed, the two companies are expected to generate substantial synergies, believed to be in the region of £400m per annum, equivalent to about 50 percent of Three’s annual running costs.

A spokesman for O2 noted that “Subject to agreement as a result of these negotiations and any necessary approvals including merger clearance, this will strengthen our future as a leading, and highly trusted UK communications provider at a time when the demand for mobile connectivity has never been greater. Three is known for campaigning on behalf of its customers, much like O2. We are confident that an agreement will mutually benefit the customers of both companies, as well as drive better value, quality and investment in one of the most digitally competitive countries in the world.”

Ratings agency Fitch has lent its support to the transaction, noting in a statement that the deal is likely to be a positive for the Spanish firm as it will allow them to focus on the key Latin America market.

Fitch also noted that the impending arrival of quad play services in the UK could possibly weaken the standing of traditional telecoms firms moving forward. Quad play companies are likely to start taking a bigger share of the UK market. In late January, Britain’s dominant pay-TV supplier Sky announced plans to launch its own mobile telephone service from 2016 onwards. The company will partner with Telefonica to offer the mobile voice and data services that will enable them make inroads into the quad play market.

Richard Summerfield