Telefónica courted by Hutchison Whampoa regarding O2 UK sale

Telefónica may have been offered a lifeline regarding its UK mobile operation by rival Three UK's parent company Hutchison Whampoa, as the Hong Kong-based company seeks to expand its European business.

The companies are in the early stages of talks over a £9 billion (€11.7 billion/$13.6 billion) deal for O2 UK Bloomberg reported, citing a Sunday Times article.

An acquisition in the UK would mimic a similar deal the pair struck in Ireland in 2014, and is likely to face just as close scrutiny as that Irish deal because a UK agreement would reduce the number of full mobile network operators (MNOs) in the market from four at present to three.

The deal to acquire O2 Ireland also saw a reduction in the number of MNOs in that market, meaning approval was only granted under strict conditions designed to maintain competition.

News of the talks comes just weeks after BT revealed it had entered into exclusive negotiations to acquire EE from its parent companies Orange and Deutsche Telekom. O2 UK was reportedly also in BT's crosshairs before the UK incumbent opted for the exclusive talks with EE.

At the time, Ovum analysts said O2 UK would lose out if BT succeeded in acquiring EE, noting that Telefónica is seeking an exit from the UK market where operators are increasingly moving towards converged services. Any sale of its UK business could also enable Telefónica to cut its group-wide debt, which stood at €45 billion ($52.1 billion) as of mid-December.

An acquisition of O2 UK would strengthen Three UK's position in the face of that growth in converged services. The latter has not invested in fixed-line infrastructure, focusing instead on mobile data tariffs.

Telefónica could also still seek a deal to sell O2 UK to BSkyB and TalkTalk, and has yet to rule out an IPO of its UK operation, the Financial Times reported. A source told the newspaper that there is currently no certainty that Telefónica and Hutchison Whampoa would reach a deal, noting that there is no rush to reach an agreement given that the deal between BT and EE is not expected to be concluded until 2016.

The Spain-based operator in November agreed a MVNO deal with TalkTalk, replacing Vodafone as the network provider.

The reports Hutchison Whampoa is eyeing O2 UK also come a week after the Hong Kong company revealed it is restructuring its ownership structure in a bid to attract more investors to the company.

For more:
- see this Bloomberg report
- view this Financial Times article (sub. req.)

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