Hutchison Whampoa in talks to acquire O2 – Consolidation on the Horizon

POSTED BY Steffen Sorrell
News has emerged today that Hutchison Whampoa is in talks with Telefónica with regards to a potential acquisition of the latter’s subsidiary, UK operator O2. The deal, which is unlikely to be inked for some weeks owing to an exclusivity agreement, is reported to be worth up to $15.3 billion.

Should the deal go ahead and be approved by EU regulators, Hutchison’s subsidiary, 3UK, would leapfrog from a position as the smallest of the major UK mobile operators to claim the throne as the country’s largest carrier.

Whether the deal will stand up to regulatory approval remains to be seen, given the fact that the UK would be left with only 3 major operators; however, given the fact that Hutchison recently closed out its acquisition of O2’s Irish operations one would expect a similar decision to be made where the UK deal is concerned.

Furthermore, regulators notwithstanding, network sharing agreements, such as those currently in place between EE and 3UK, may yet be affected by the deal.

Operator Challenges

As we note in our recent report on Mobile Operator Business Models, operators are increasingly faced with a double helping of decreasing revenues on the one hand, and rising network costs on the other.  Furthermore, the UK mobile market is one that has largely reached saturation point; there are very few options remaining to increase revenues from a consumer perspective. It is likely that for these reasons, Telefónica has been looking for an exit from the UK market, with juicier pickings available in its operations in developing markets.

On the flipside, 3UK now has the opportunity to capitalise on expanded 4G coverage and to dramatically scale up its reach; not only will its user base be substantially increased, but these users are also the most loyal in the UK. Churn for O2 was reported to have fallen to a ‘market-leading’ all-time low of 1% last summer. In a market where margins are slim, such a metric is absolutely crucial for operators.