Telefonica seals deal to sell British mobile unit O2 to Hutchison for $15.3 bn

Spanish telecom giant Telefonica SA yesterday said that it has finalised a deal to sell its British mobile unit O2 to Hong Kong billionaire Li-Ka Shing's Hutchison Whampoa for £10.25 billion ($15.3 billion) in a deal that would create Britain's biggest mobile operator.

The deal, which is the largest overseas acquisition by Hutchison, comes two years after it acquired Telefonica's O2 Irish business for €780 million ($1 billion). (See: Hutchison Whampoa acquires Telefonica's Irish business for €780 mn)

Hutchison Whampoa, whose diverse businesses include port, retail, property development, energy, infrastructure and telecommunication, had in January said that it was in exclusive talks to buy O2.
 
Madrid-based Telefonica said in a statement, "A definitive agreement has been reached after the finalisation of the process of due diligence on O2 UK."
 
Under the terms of the agreement, Hutchison will pay £9.25 billion ($13.84 billion) in cash, and an additional £1 billion in deferred payments if the merger of O2 with Hutchison's existing British carrier, Three, met cash-flow targets.

Hutchison plans to fund the deal through a £6 billion bridge facility that Hutchison 3G UK Investments has entered into with HSBC, and the remaining through its own cash resources.

Hutchison, based in Hong Kong said the deal to buy O2 "will create the number one mobile operator in the UK,'' while Hutchison's group managing director, Canning Fok, said that the deal ''will create a business with unmatched scale and strength that will allow us to better compete against other operators in the marketplace.''

The deal will see the merger of Britain's second-largest wireless provider O2 with Hutchison's existing British carrier, Three UK, and become the largest mobile operator in the country with nearly 33 million customers.

The merged company would hold a 41 per cent market share and dethrone current leader EE, which holds a 29 per cent of the 83 million mobile customers in the UK.

Three, which is 100-per cent owned by Hutchison Whampoa, operates 3G services in Ireland, the UK, Austria, Denmark, Hong Kong, Italy, Macau and Sweden.

British telecom giant BT Group Plc had said late last year that it was in talks to buy O2, but opted to buy EE mobile phone network in the UK from its joint venture partners Orange of France and Deutsche Telekom of Germany (See: BT raises £1 bn from investors to fund EE takeover).

O2, then known as Cellnet, was formed as a 60:40 joint venture in 1985 between BT and British telecom company Securicor. BT acquired Securicor's 40-per cent stake in Cellnet in 1999 and renamed it BT Cellnet and later to O2.

O2 runs 2G, 3G and 4G networks across the UK, as well as O2 Wifi and owns half of Tesco Mobile. It has over 450 retail stores, over 23 million customers and holds 26.2 per cent market share.

Telefonica, which has operations across Europe and Latin America, had acquired O2 UK along with its other units in Germany and Ireland from BT in 2005 for £17.7 billion.

After selling its units in Ireland to Hutchison for €850 million and a majority stake in its Czech Republic unit to local billionaire Petr Kellner's PPF Group NV for €2.3 billion and raising €3.62 billion by selling new stock of its German unit in a public offering, the Spanish group now wants to pull out of the UK market and focus on its operations in its main markets in Spain, Germany and Brazil.

Last month it also sold half of its 5-per cent stake in China Unicom for about $860 million and is said to be planning to also sell the remaining 2.5 per cent.

The current sale will also reduce Telefonica's massive €45 billion debt pile, which it had accrued due to its expansion across Europe and Latin America.

Hutchison is currently overhauling its vast business that spans across industries ranging from infrastructure to phones and retail. It is in the process of merging its two biggest companies, to be named CK Hutchison Holdings Ltd, while it plans to spin-off its real-estate assets into a separate company.

Completion of the transaction is expected in 2016 after satisfactory approvals from UK and EU competition regulators.