Hutchison and Telefónica Place a Rescue Call

23 Jan 2015 | Author: | No comments yet »

Hutchison Whampoa close to buying UK’s 02 for $15 billion.

An O2 mobile phone store, operated by Telefonica SA, in Manchester, U.K. Hong Kong-based conglomerate Hutchison Whampoa said it’s in exclusive talks to buy mobile network provider 02 for up to 10.25 billion pounds ($15.75 billion), in a move that advances the consolidation of the U.K. telecom sector and further stokes speculation over the intentions of Asia’s richest man.Hong Kong • Hong Kong billionaire Li Ka-shing’s flagship company said Friday it’s offering about $15 billion for the British business of European mobile phone operator Telefonica. Hutchison Whampoa Ltd., which already owns British mobile operator Three, said in a statement that it has been in “exclusive negotiations” with Telefonica SA over the past several weeks for the potential purchase of O2 UK. Hutchison already operates the Three Mobile network in Britain, and buying second-ranked O2 from the Spanish group in Mr Li’s biggest ever takeover will make it the top mobile operator in the country.

Photo: Bloomberg News Hutchison Whampoa ’s proposed £10.25 billion ($15.3 billion) takeover of Telefonica’s British mobile phone unit O2 is more emergency call than social invitation. Li has already spent over $30 billion by some estimates on buying assets outside China and Hong Kong, prompting speculation that he is preparing to abandon the former British colony. Shares of Hutchison, which had been suspended for a short time yesterday morning as reports swirled over the sale, were up 2.5 percent by 3:25pm in Hong Kong.

Hutchison said its offer includes $13.9 billion in cash plus up to another $1.5 billion in interest payments after the deal is completed, depending on how O2 and Three perform once they are combined. The company made its first forays into European telecoms markets in 2000, but returns from the business have lagged other parts of Mr Li’s ports-to-property empire. Operating in one of Europe’s least profitable mobile markets, Spanish telecom-company Telefónica has been fighting an uphill battle with O2: U.K. service revenue has been slowly declining for the past three years, Citi notes. Mr Li and his chief deal-maker Canning Fok have doubled down in response, sinking more money into Europe as they look to snap up businesses from operators who have been battered by the continent’s debt crisis.

Earlier this month, Li carved out the Hong Kong property assets that have been the foundation of his fortune from the rest of his Cheung Kong conglomerate, which is more internationally focused. The move comes after Hong Kong investment icon Li — a former plastic-flower seller who is now Asia’s richest man — announced this month a US$24 billion revamp of his vast business empire, and is the latest in a string of purchases. “Li Ka-shing likes to buy European assets — one of the reasons is they are relatively cheap,” Core Pacific-Yamaichi International Hong Kong Ltd (京華山一) financial analyst Kevin Tam (譚思晉) said. “Buying a telecoms company can generate a stable growing cashflow… After its attempt to combine with BT faltered late last year, Telefónica turned to Hutchison’s 3 Group, the smallest of the four main U.K. mobile operators. In the last week alone, Li has agreed to buy Eversholt Rail Group Plc., a U.K.-based maker of railcars for $1.5 billion, and Dirx, a chain of Dutch drug stores, for an undisclosed price. The marriage of Three Mobile and O2 UK would mark the latest move towards telecoms consolidation in Britain, where the market is split between four mobile network operators and four separately owned fixed-line and broadband providers.

Due to its size and lack of fixed-mobile convergence capabilities, 3 Group is also the most vulnerable remaining player if BT completes plans to merge with operator EE. While the deal will attract scrutiny from competition authorities, European regulators have allowed the number of telecoms operators in countries including Austria and Ireland to shrink from four to three through mergers and acquisitions. “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,” Frank Sixt, Hutchison’s group finance director, told reporters.

The price looks reasonable at about 7.6 times 2015 earnings before interest, taxes, depreciation and amortization, compared with about 8 times that BT is prepared to pay for EE. The spree of foreign acquisitions comes against a backdrop of speculation that Li, long regarded as a kind of capitalist ‘Superman’ by the Communist authorities in Beijing, has fallen out of favor with them. In recent weeks, bloggers in government-backed mainland publications have started to refer to Li as a ‘big tiger’, a term also applied to some of the highest-profile victims of Xi Jinping’s anti-corruption campaign such as security boss Zhou Yongkang.

However, because both companies obtain the majority of their revenue outside the U.K., regulatory approval may fall to EU antitrust authorities, although U.K. ones could still ask to review the deal. If the O2 merger with Three goes ahead, it would leave Britain with three mobile phone networks, down from four, a move some experts say could lead to price hikes owing to a lack of competition.

It said it had agreed to pay an indicative price of £9.25bn, with another £1bn in “interest sharing payments” should the combined business reach certain cash flow targets. Telefonica SA, 02’s Spanish parent, has been looking to sell the business for some time, as its strategic position in the U.K. market comes under threat from the spread of ‘quad play’ strategies offering TV, broadband internet and fixed and mobile telephony.

The company is in talks with private equity firms and others to bring in minority partners, who would be offered not more than a 30% stake, Mr Sixt added. The two largest players in voice telephony in the British market, BT Plc BT 1.76% and Vodafone PLC [“fortune-stock symbol=”VOD”], are both moving in the direction of being multi-service providers. BT said last year it will buy EE, the operator of the U.K.’s first 4G network, from its French and German owners, and beefed up its TV offering substantially with a big-money bet on English soccer rights.

Reuters reported in November that Hutchison, whose Three is Britain’s smallest mobile network, was waiting in the wings to buy whichever group BT spurned. For Hutchison, strategic questions related to the companies’ ability to provide services across mobile and Internet will still exist, since neither 3 Group nor O2 offers broadband. In 2013, it approached Telecom Italia with a proposal to merge their mobile businesses whereby Hutchison would have taken a near 30% stake in Italy’s biggest phone operator. When asked whether the company could move quickly to consolidate Italian operations, Mr Sixt said: “I like to think we can move very quickly in any circumstance.

It also needed fresh cash to consider potential acquisitions in Brazil, its biggest market along with its home country, where it is investing massively to build an optic fibre network.

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