Telefonica To Sell O2 For Over £10 billion

Telefonica has entered "exclusive negotiations" with Hong Kong investment conglomerate Hutchison Whampoa to sell O2 for £10.25 billion, the Spanish company said Friday.

The announcement confirms speculation earlier this week that billionaire businessman Li Ka-shing, Asia's richest man and chairman of Hutchison Whampoa, had his eyes set on the acquisition.

It means Ka-shing's network Three would combine with O2, Britain's second-largest mobile provider, to form a much larger customer base. Three is the UK's fastest growing network and has around 7.5 million customers, while O2 has 23 million.

In a statement, Telefónica said:

The agreement includes an initial amount of £9.25bn (approximately €12.2bn) which would be paid at closing of the transaction and an additional deferred payment of £1.0bn (approximately €1.3bn). The exclusivity period will last several weeks, allowing Telefónica and Hutchison Whampoa Group to negotiate definitive agreements, while the necessary due diligence process on O2 UK is completed.

The company said the move marks "another step in Telefónica's transformation process" as it looks to become a leading digital telecoms operator and forge long-term growth.

Any deal would massively shake-up the already fluid mobile industry in the UK. In December, BT entered exclusive talks with Deutsche Telekom and Orange to buy EE for £12.5 billion.

The merger of Three and O2 could cause regulatory problems as it would reduce the number of providers by four to three. As the BBC suggests, this could cause a "competition issue" because it would leave just Three, EE, and Vodafone as the market's key players.

But Hutchison Whampoa group finance director Frank Sixt says there have been similar deals in other countries. In Ireland, a change from four to three companies was approved by competition regulators in Brussels.

"The European Commission has taken a positive view of four-to-three consolidations of mobile in three cases now...and we believe that the precedents that they have set in those transactions will apply for this transaction," he told the BBC.

Others think there is cause for concern. Chief research officer art telecoms consultancy Ovum, Mark Newman, questions whether such a consolidation would force prices up. He points to the Austrian market, which has recently gone from five operators to three, consequently leading to price increases.