In move that will certainly arouse the interest of other European mobile operators, Spanish telecoms giant Telefonica could be about to gain entry to two of Europe’s most important markets, the UK and Germany, with its bid to acquire UK-based mobile operator O2 for GBP17.7 billion ($31.3 billion).
Under the terms of the deal, Telefonica is offering 200p ($3.53) per O2 share, which represents a premium of approximately 22% over the closing price of the operator’s shares of 164.25p ($2.90) on Friday October 28, 2005. The two companies expect to save E293 million ($351 million) a year by 2008 from economies of scale. More importantly, however, the offer has received the approval from O2’s board of directors.
Commenting on the deal, Telefonica’s chairman, Cesar Alierta, said that the move would boost Telefonica’s growth profile, allowing for greater economies of scale and enabling the company to gain exposure within Europe’s two largest markets.
UK-headquartered O2 was formerly known as BT Cellnet before it was spun off from BT Group in 2001. Telefonica has revealed that O2 will keep its existing brand, although questions remain over Telefonica’s long-term strategy to integrate the unit with its own mobile unit, Telefonica Moviles.
For a long time now there has speculation over the future of O2, one of only a few independent pure-play mobile phone operators left in Europe. O2 operates in the UK, Ireland, and Germany, and is Europe’s sixth largest mobile phone company, with a total of 26 million customers, over 15 million of which are in the UK. It has about 15,000 employees, and last year reported revenue of GBP6.68 billion ($11.82 billion).
O2’s limited geographical reach, as well as its relative lack of scale to compete against some of the more global players such as Vodafone Group, France Telecom’s Orange, and Deutsche Telekom’s T-Mobile International, means there have been a number of unsuccessful attempts to woo the company over the years. In February 2004, O2 rebuffed a takeover offer from Royal KPN, the largest telecoms carrier in the Netherlands. Then, only a couple of months ago, it was revealed that both KPN and Deutsche Telekom had been in discussions regarding a partnership to acquire O2, but talks ended without agreement on an offer.
Telefonica is the world’s third largest telecoms company based on market value, and is ranked behind mobile goliath Vodafone, and US-based fixed-line and mobile operator, Verizon Communications.
The move for O2 allows Spain-based Telefonica to realize its long-held ambition to break into the highly competitive UK market as well as to re-enter Germany. Telefonica abandoned Germany in 2002 after failing to build a third-generation mobile operation there.
Telefonica’s principal market is South America, and, in total, it employs some 173,000 staff with a customer base of approximately 145 million as of June. However, Europe has been something of a problem for the company, despite its leading position in its domestic market.
Telefonica has been under pressure in Spain, where market leader Telefonica Moviles is battling the Spanish operation of Vodafone, as well as the mobile telephone unit Amena Movil, which was recently purchased by France Telecom for E10.6 billion ($12.9 billion). This lack of presence in some of Europe’s major markets was viewed as something of a handicap for a company with global ambitions.
Telefonica expects the O2 deal to be completed by January 2006, subject to shareholder and regulatory approval. However, the market was less sure the deal would go smoothly, with speculation rife concerning a possible counter offer from T-Mobile International.
T-Mobile is already a player in the UK market, and it recently revealed that second-quarter revenue fell 8.7% amid fear that growth was stalling. All eyes are therefore turned towards Deutsche Telekom’s chief executive Kai-Uwe Ricke. A rival bid from KPN is deemed less likely because there is doubt it has a strong enough balance sheet.