Hutchison, Telefónica in merger talks over O2, Three – report

Hong Kong-based Hutchison Whampoa and Spain’s Telefónica are in talks over a possible merger of their respective UK subsidiaries Three and O2, according to a report. Following BT’s preliminary talks with owners of EE, Orange and Deutsche Telekom (DT), as well as Telefónica over O2, it was reported Hutchison was also preparing to bid for one of the two UK operators.

However, BT has since then entered into exclusive talks with Orange and DT to buy the UK’s biggest mobile operator EE, leaving the second biggest O2 up for grabs.

Whether Hutchison, whose Three is the smallest MNO in the UK, can acquire O2 of course depends on the success of any talks with Telefónica. According to reports Hutchison would have to fork out a significant amount for O2 as Telefónica could be asking for up to £8-9 billion for the operator. If a deal is reached, another hurdle will be to satisfy the UK regulator Ofcom the purchase would not compromise fair market competition.

“Hutchison have been buying up assets in Europe over the last few years (e.g. Austria, Ireland) and this would be a logical next step in the market as the telcos all adapt to secure their position,” Philip Kendall, industry analyst at Strategy Analytics told Telecoms.com.

It has also been reported Telefónica is keeping its options open, and could be considering a deal with Sky or TalkTalk. If Three and O2 want to continue to operate their current mobile-only agendas, they would of course be stronger together.

“The BT/EE deal does reinforce the increasingly quad-play nature of the market from a supply side, with O2 and Three sticking to their mobile-only agendas,” Kendall said.

“So a combination of those two operators obviously gives them more scale and a better set of spectrum assets to play with in the medium term. Both of those players have a reputation as lower cost players in the market, with O2 moving into this space more over the last two years, and their ability to execute on that would be helped with the increase in scale from a combination.

“However, as promotional activity increases on the quad-play side in 2015, a credible wireline play is going to become increasingly important to fight against the muscle of BT/EE, Virgin, Vodafone and Sky.”

It is likely the UK regulator Ofcom will pose some stringent conditions on a proposed acquisition of O2 by Hutchison. Ofcom has been supportive of the current UK mobile operator landscape containing four major networks, and may not be keen on letting the number shrink. However, the decision-making could be passed to the European regulator which has been more lenient on deals decreasing the number of operators from four to three in Germany and Austria last year.