O2 may extend European reach

Telefonica Group has announced a cash bid of just under £18bn for O2

Spanish telco Telefonica Group has announced a cash bid of just under £18bn for O2, including its German, Irish and UK operations. If the deal goes through, it may make it easier for corporate customers to negotiate and use mobile services across Europe.

Telefonica chief executive Cesar Alierta said, "[This purchase] will allow us to gain economies of scale and open the two largest European markets for us."

The deal should complete in early 2006 subject to regulatory approval and unless a better offer is posted by one of O2's rivals, or previous suitors Dutch incumbent KPN and German mo- bile communications firm T-Mobile. However, both said they would not make a new bid for O2.

Commenting on the likely takeover, Current Analysis analyst Michael Ransom said, "In the short term I don't think O2's customers will notice any difference, but in the medium to long term, who knows?"

O2 and Telefonica are both backing I-mode technology for content delivery, and with I-mode planned or launched in all of Telefonica's and O2's European markets there would be clear advantages and synergy for a merged firm.

Marta Mu–oz Mendez-Villamil of analyst Ovum said Telefonica's bid was no surprise because O2 has had a "for-sale tag" on it for a long time. She noted that this is not the first time Telefonica has approached O2, if rumours are to be believed.

"O2's relatively small size in Europe, in comparison with larger players such as Vodafone, Orange or T-Mobile, makes it the perfect acquisition target. Surviving as a small player in a pond with such large fish would be a difficult task for O2," Mendez-Villamil added.

Observers said that a tie-up with Telefonica would give O2 the scale to compete with other larger mobile telcos in Europe.

A takeover would also give O2 an entry point into Latin America, perceived as a market with huge potential for future growth.

But other observers said competitiveness in the UK might suffer if overseas firms such as Telefonica focus their long-term strategy on their own countries' network infrastructure rather than that of the UK.

O2 recently announced that it has over 15 million active customers in the UK, including those signed up to mobile voice and data services under its own brand and a partnership deal with Tesco.