Three's £10.5bn deal for O2 nears completion - announcement expected this week

EU-led consolidation of mobile market continues as Three owner Hutchison Whampoa comes close to finalising deal for rival O2

Hutchison Whampoa, operator of the Three mobile network in the UK, is close to finalising its £10.5bn deal to purchase rival O2 from Spain's Telefonica.

The deal would make the merged network - informally dubbed O3 - the largest in the UK as the European mobile telecoms industry undergoes a round of consolidation, reducing the number of national operators in geographies across Europe.

Hutchison Whampoa said in a statement today that it is still in "exclusive negotiations" with Telefonica, and would update the market soon, according to a report in the Financial Times. It added: "A person familiar with the situation said the deal was still expected to be announced 'early this week', depending on when final details were signed off."

However, the Hong Kong-based company, which in the 1990s also set up and sold Orange, also needs to raise funding to help finance the deal, while selling about 30 per cent of the new group to outside investors - a stake valued at about £3bn.

Three's deal for O2 follows telecom giant BT's decision to re-enter the market via a £12.5bn deal for EE - the merged T-Mobile and Orange mobile operator. Ironically, perhaps, O2 used to be BT's old Cellnet mobile unit, but it eschewed a re-aquisition in favour of a swoop for the larger EE.

Before both deals can go through, they will need to be scrutinised by competition authorities in both the UK and European Union. Both deals, however, are expected to be waived through with minimal conditions attached due to the favourable political climate.

Consolidation of the mobile telecoms market across Europe is being encouraged by the European Commission, which believes that excessive competition has driven prices, and profits, down to too low a level for the investment required to achieve the EU's single-market ambitions. Jean-Claude Juncker, for example, wants to see a single market in communications across the European Union, which will require fewer operators and increased investment.

However, the current wave of consolidation has been nationally focused due to the high level of investment required in 4G and the need for access to a backbone network, which naturally favours national incumbents, such as BT in the UK, Deutsche Telekom in Germany and France Telecom in France. Vodafone in the UK, meanwhile, acquired Cable & Wireless in 2012.

"The current level and forecast growth in global mobile data traffic (eleven-fold between 2013 and 2018) not only requires substantial network investment, both to increase network capacity and to introduce new technologies, such as 4G and 5G, but also means that mobile networks increasingly depend on high-capacity fixed-backhaul links and the ability to offload mobile data to fixed networks," claimed analyst group Oxera.

Operators, such as Hutchison Whampoa, therefore need scale to be able to compete effectively against incumbent national telcos.