Three UK to acquire O2 from Telefónica

O2 deal will make Three the biggest mobile operator in the UK

Hutchison Whampoa, the owner of mobile operator Three in the UK and other parts of Europe, has agreed a £10.25bn deal to acquire rival O2 from Spanish national telecoms operator Telefónica.

The deal will propel Three in the UK from fourth place to first, ahead of Vodafone and Everything Everywhere (EE), which is currently in the process of being acquired by telecoms giant BT - the former owner of O2. Telefónica is selling O2 in order to reduce its corporate indebtedness, while Three has been taking advantage of the current market shifts to pick up assets, recently acquiring O2 in Ireland for €850m.

The deal will require the approval of the competition authorities in both the UK and the European Union, but it comes at a time of Europe-wide consolidation in the industry, encouraged by the European Commission. The EC has been concerned that mobile operators in Europe are insufficiently profitable, partly as a result of fierce competition between too many players.

Hutchison Whampoa is therefore confident that the deal will be waved through. "The European Commission has taken a positive view of four to three consolidations of mobile in three cases now... and we believe that the precedents that they have set in those transactions will apply for this transaction," said Frank Sixt, Hutchison's group finance director.

The company will fund the deal with a £6bn bank loan, and it is also in talks with private equity and other companies to bring in minority partners, who would be offered not more than a 30 per cent stake, added Sixt.

Another factor encouraging pan-European consolidation, particularly in the shape that it has taken, according to analyst group Rethink, is the access to a backbone network, which across Europe is dominated by national telecoms companies.

All mobile operators need a fast backbone network to underpin their mobile operations, and national telcos, which are typically the largest mobile operators in their geography, have ready access to the best networks in their respective countries, giving them an advantage. Independent mobile operators have to lease capacity from their better resourced rivals.

On top of all that, mobile operators are also faced with big bills for network upgrades, with the shift to 4G/LTE followed by LTE Advanced, requiring many more, but smaller, base stations.

And, with the market moving towards so-called "quad plays", in which customers buy mobile, home phone, high-speed home internet and television from one operator, specialist telcos with high costs would be expected to lose out.

At the same time, however, the European Union sees the mergers presaging a spate of mergers among national telcos - with Deutsche Telekom, for example, taking a 12 per cent share stake in BT as a result of the EE deal. France Telecom, meanwhile, will take a four per cent share stake in BT.

According to Reuters, the proposed O2 deal comes just two weeks after Hutchison Whampoa undertook a major overhaul of its operations. It will be split into two listed companies, one focused on property and the second on the sprawling company's other businesses, including telecoms, ports and infrastructure.

Hutchison Whampoa started up Three in the UK in 2000 as a vehicle to bid for the new spectrum being released to support 3G mobile services. The company started offering services to customers in 2003, but struggled in what was then a five-player market against France Telecom-owned Orange, Deutsche Telekom-owned T-Mobile, O2, the re-branded BT Cellnet, which was acquired by Telefónica in 2005, and Vodafone.