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Three to buy O2: Enters exclusive talks to buy rival for £10.25bn

With Telefonica reportedly eager to offload the O2 brand, Three has emerged as the front runner to acquire it

o2 sign

Three's owner looks set to buy O2 for 10.25bn,now BT has dropped plans to buy the firm in favour of rival network EE for the eye-watering sum of 12.5 billion

As IT Pro readers will undoubtedly know, BT spent a portion of December umming and ahhing about whether to buy EE or O2, as part of its quest to establish itself as a major force in the "quad-play" market. This would position the firm so that it could offer, mobile, TV, landline and broadband services to customers.

Despite emerging as the odds-on favourite to be snapped up by BT, the telco opted to buy EE instead, leaving O2 high and dry.

But not for long, as O2 has been linked to several other players in the mobile market since being jilted by BT last December, with numerous reports suggesting its owner - Telefonica - is keen to dispose of the business soon.

This is because, according to a report in The Financial Times, Telefonica fears being saddled with a pure-play mobile operator while its competitors build out their quad-play propositions.

Below, we run through the roll call of potential suitors for O2, as the race to acquire the UK's second biggest mobile operator really starts to heat up.

Three "in exclusive talks" to buy O2

The owner of Hutchinson Whampoa, the company responsible for running Three in the UK, has emerged as the most likely candidate to acquire O2, after confirming exclusive talks between the pair.

In a statement to the Hong Kong stock exchange, the company confirmed that it has entered into "exclusive negotiations" with Telefonica that are expected to last around three weeks.

Reports about Hutchinson's interest in O2 began to circulate earlier this week, following a weekend report in The Sunday Times. This claimed Hong Kong-based typcoonLi Ka-Shing was considering shelling out9bn for O2, in an attempt to strengthen his hold on the UK mobile telco market.

"The transaction remains subject to, inter alia, satisfactory due diligence over O2 UK,agreement on terms and signing of definitive agreements, and the obtaining of all requiredcorporate and regulatory approvals," the statement read.

It also said the fact the talks were taking place does not mean a deal is guaranteed to take place.

"Shareholders and potential investors of the Company should note that such negotiationsmay or may not result in any transaction, and accordingly are advised to exercisecaution when dealing in the shares of the Company," the statement added.

Canning Fok, the managing director of Hutchison Whampoa, was reported to have said the previous week: "In Europe, we are doing telecommunications consolidation. This is a top priority for us."

He explained Three presently is a very small force in the scheme of things and through buying a growing network like O2, the company could have a much stronger hold on the market.

If Ka-Shing does purchase O2, the company will join his wide-ranging portfolio that currently includes the likes of Superdrug, the London electricity network and Northumbrian Water, trading as Essex & Suffolk Water.

Market impact

As the second biggest mobile network in the UK, O2 could certainly boost Three's UK presence, although there are concerns merging the two could raise some questions from the Competition Commission.

Kester Mann, principal analyst of operators at market watcher CCS Insight, said the deal is likely to come under closer scrutiny from regulators than EE and BT's potential tie-up because of the impact it will have on the mobile sector.

"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," he explained.

"However, the European Commission would make the final judgement given the international footprints of both Hutchinson and Telefonica.

"Having agreed a similar deal in Germany last year, it may set a precedent that could see the deal receive the green light, albeit with significant concessions."

Additionally, there would be mast-sharing and spectrum issues to deal with if Three wants to grow its 3G and 4G network coverage, but it could also have some huge ramifications for Vodafone too.

"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 per cent. It would also relegate Vodafone to last place in its home market," Mann explained.

"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."

Sky to buy O2?

Sky is said to have held talks with Telefonica about the possibility of snapping up O2, a move that could also see it enter the quad-play market, according to reports in the Spanish press.

The talks between Sky and Telefonica may also have centred on the opportunities for commercial partnerships between the broadcaster and O2, theFinancial Timesclaims.

It's thought this would involve Sky offering O2's network services to its customers under its own brand, while the network operator's customers would benefit from access to Sky's television offerings.

The same story also suggests Sky is unlikely to push ahead with purchasing O2 outright because of the outstanding debts it's accrued through its ambitious European expansion strategy.

TalkTalk mulls O2 buy

Spanish media reports have also linked TalkTalk to a possible buyout of O2, which would markedly firm-up its mobile proposition for customers.

The firm already uses Vodafone's network to deliver mobile services to customers, through a long-standing MVNO agreement, so buying O2 would make sense.

News of the merger talks caused the firm's share price to increase 3.1 per cent yesterday, reports The Financial Times.

This story was originally published on 19 January, before being updated (on 23/01/2015) to reflect Sky and TalkTalk's rumoured interest in acquiring O2.

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