Telefónica bids £17.7bn sterling for O2

31 Oct 2005

UPDATE: It emerged today O2, which has mobile operations in Ireland, the UK and Germany, has agreed to a takeover offer from Spanish communications giant Telefónica for £17.7bn sterling.

The deal will give Telefónica an important hold in two of Europe’s largest mobile markets, Germany and the UK.

Telefónica, which is the world’s fifth-largest telecoms firm by market value, said it would pay 200 pence per share in cash – a 22pc premium to O2’s closing share price on Friday – sending the UK-based company’s shares surging 24pc.

It is believed Telefónica swooped on O2 just as another European mobile giant T-Mobile was readying its bid for the company. Dutch player KPN was also interested in buying O2 and was at an advanced stage of negotiations last year before retiring from acquiring O2.

Telefónica said it would generate an estimated €293m of annual operating cost and capital expenditure synergies by 2008. The one-off cost of achieving the savings would be €39m.

Telefónica has a customer base of around 145 million and around 173,000 staff. “The combination with O2 is a logical step for Telefonica in pursuing its strategic goal of providing its shareholders with both growth and cash returns,” Telefónica said in a statement.

Marta Muñoz Méndez-Villamil, a senior analyst with the telecoms and IT advisory firm Ovum, said the news was not a surprise and that O2’s relatively small size in Europe, in comparison with larger players such as Vodafone, Orange or T-Mobile, made it the perfect target for an acquisition.

“For Telefónica, it offers the possibility to enter two of the largest European markets [Germany and the UK], with a combined mobile customer base of more than 141 million, and mobile revenues estimated to be above US$26bn in each market,” she said. Telefónica’s mobile content strategy is similar to that of O2, she added. Both operators have launched I-Mode services and are focused boosting revenues through data services.

“For O2, this deal offers the possibility to benefit from the economies of scale of belonging to a larger operator and it acts as an entry point to one of the regions with the largest growth potential in future years: Latin America. Surviving as a small player in a pond with such large fish would have been a difficult task for O2,” said Méndez-Villamil.

In addition, the O2 brand is set to remain. Méndez-Villamil welcomed this move, as the brand is well established in its markets whereas Movistar, as Telefónica’s mobile operation is called, is unknown as a name in the UK and Germany. “This deal is still to be finalised at the beginning of 2006 and there is still time for a counter-bid, but if it goes ahead, the potential benefits could be greater than the risks,” she concluded.

By John Kennedy and Gordon Smith