Three Confirms Talk Of O2 Buyout

Three is definitely in negotiations with O2 with an eye to purchasing its rival, the company has confirmed

Following speculation of a merger between UK branches of mobile networks Three and O2, Three’s parent company Hutchinson Whampoa has today confirmed that it has been involved in “several weeks” worth of negotiations with O2’s parent, Telefonica.

According to a report from the Financial Times, the two companies have discussed a possible acquisition for a figure of £10.25 billion, however, Hutchinson Whampoa’s financial director has stated there is still much left to cover in further meetings before a deal can be finalised.

So far the deal on the table would see Three’s owner paying out the originally rumoured £9.25 billion figure in cash with an additional £1 billion in deferred payments. Naturally such a deal would also need to run the gauntlet for regulatory approval, but if it gets the green light it is believed the sale would be completed by the middle of 2016.

Kester Mann, Principal Analyst for Operators at CCS Insight, said, “The agreement is a win-win for both companies which were looking increasingly vulnerable as pure-play mobile operators in a market rapidly transitioning towards multi-play.”

Regulator approval might not come easily, however. Three’s acquisition of O2 would be a massive state shift for the UK mobile network industry and one that regulator Ofcom might be wary of. Ofcom has a duty to maintain fair competition but also attempts to keep prices low for consumers, historically it has tried to ensure there are at least for mobile network competitors in the space in order to achieve this, but a merger could throw a serious spanner in the works. Not only that, but with talk of BT’s acquisition of EE still ongoing, these big shifts together could rock the boat rather a lot.

“Any agreement would provoke heavy scrutiny from competition authorities. Unlike the proposed acquisition of EE by BT, this deal would reduce the number of mobile operators from four to three. Ofcom has worked hard to maintain the UK as a four-player market and would have significant reservations,” said Mann.

“However, the European Commission would make the final judgement given the international footprints of both Hutchison and Telefonica.”

“One possible scenario is that the new company is forced to open its network to virtual providers. This could offer an opportunity for Sky, which lacks a mobile presence. Were Sky to wholesale mobile access from the combined 3 and O2, it could offer compelling bundles of fixed-line, mobile and TV services in competition with BT and Vodafone. Other companies such as Tesco and TalkTalk could also benefit from wholesale mobile access.”

Ernest Doku, telecoms expert at uSwitch.com, said, “If Hutchinson Whampoa pulls it off, the fear is the consolidation of two of the big four UK mobile networks could have a knock-on effect on prices due to a less competitive market.

“But the UK has a reputation as one of the most cut-throat mobile markets in the world, and the move towards quad-play – where phone, broadband, TV and mobile services come from a single supplier – enabled by potential mega mergers like EE and BT, should keep competition fierce in the coming months.”

The FT cites an anonymous person “familiar with the matter” stating that Telefonica and Hutchinson plan to submit the Three/O2 merger to Ofcom in unison with BT’s buyout of EE. Allegedly the hope is that Ofcom will see BT’s acquisition as being more significant in changing the mobile network landscape with additional TV and broadband services, making the O2 sale seem like small potatoes by comparison.

“Three and O2 have quite similar brands,” said Doku, “Both have a focus on consumer benefits and offer core services like 4G without a premium. It remains to be seen whether Three’s major perks, like unlimited data, can be sustained with such a large influx of customers.”

Mann added, “If approved, the deal would transform the UK mobile market. It would create a new leader with over 30 million customers and a market share of 41%. It would also relegate Vodafone to last place in its home market”

“The deal might not necessarily be good news for consumers. Evidence in other European markets shows that mobile tariffs tend to rise following in-market consolidation. Regulators will be keen to ensure this is not the case in the UK.”

Paul Briden 11:26, 23 Jan 2015

by pbriden via Featured Articles