Hutchison to Buy U.K. Mobile Network O2 for $15.3 Billion

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The O2 logo outside a mobile phone store in Colchester, U.K.

The O2 logo outside a mobile phone store in Colchester, U.K.

Photographer: Chris Ratcliffe/Bloomberg

Li Ka-shing’s Hutchison Whampoa Ltd. agreed to acquire Telefonica SA’s O2 unit, creating Britain's biggest wireless provider by customers and marking a milestone in the billionaire’s efforts to remake the Hong Kong conglomerate.

The 10.25 billion-pound ($15.3 billion) price includes an initial sum of 9.25 billion pounds in cash, with the remainder to be paid when certain financial targets are met. O2 said regulatory approval may take a year, while Telefonica said it expects the transaction to be completed by June 2016.

Hutchison shares rose in Hong Kong as the deal, reached after two months of exclusive talks, paves the way for merging its Three business with O2 into a mobile carrier with more than 30 million subscribers. It also furthers Li’s focus on businesses that consumers rely on for basic services, insulating the retail-to-ports group’s income from economic cycles.

“This is a continuation of the company’s participation in businesses that relate to daily necessities,” said Ben Kwong, a director at brokerage KGI Asia Ltd. in Hong Kong. “They will continue to acquire related business, and over time, when they mature, they may restructure or spin it off.”

Telecommunications was Hutchison’s second-biggest business by revenue last year, after retail chains and before ports, according to data compiled by Bloomberg.

Telefonica shares rose 0.1 percent to 13.66 euros at 9:16 a.m. in Madrid. Hutchison closed 2 percent higher at HK$105.700 in Hong Kong, as the benchmark Hang Seng Index added 0.5 percent.

Li’s Empire

The deal will be funded by a 6-billion pound bridge facility that Hutchison 3G UK Investments has entered into with HSBC Holdings Plc and Hutchison’s own cash resources, the company said in a statement to the Hong Kong stock exchange Wednesday.

The deal comes as Li, Hutchison’s 86-year-old chairman and Asia’s second-richest man, is overhauling his business empire before handing the reins to his eldest son Victor Li.

Li is merging his two biggest companies and plans to spin off their real estate assets into a separate unit later this year.

That hasn’t stopped Hutchison from pursuing other deals as Europe’s telecommunications firms combine to gain more pricing power and amid sluggish economies that restrain the industry’s growth. In Italy, the company is in talks to merge its local operations with those of VimpelCom Ltd., according to people familiar with the matter.

Betting on Size

Revenue from telecommunications services in Europe will probably decline 1.5 percent this year after falling 2.2 percent last year, according to researcher Ovum. Besides mergers and acquisitions, carriers are pushing for more lenient regulation and introducing faster networks.

“They can drive a lot of synergies” with the agreement deal, said James Britton, an analyst at Nomura Holdings Inc. in London. “Whether that really equips them to be fully competitive in a converged U.K. market remains to be seen.”

Hutchison’s agreement would reduce the number of U.K. wireless networks to three from four. Hutchison is betting on size to compete, taking on rivals that are adding services such as TV and Internet access to lure customers.

The deal “will create a business with unmatched scale and strength that will allow us to better compete against other operators in the marketplace,” Canning Fok, Hutchison’s group managing director, said in a statement. “This very significant investment for Hutchison also reflects our continued confidence in the U.K. economy and its commitment to maintain and foster a dynamic telecommunications sector.”

Consolidation

With more wireless subscriptions than people, carriers in the U.K. have been busy preparing for consolidation. Last month, former phone monopoly BT Group Plc agreed to buy Deutsche Telekom AG and Orange SA’s mobile venture EE Ltd. for 12.5 billion pounds. BT had also held talks with O2.

Pay-TV provider Sky Plc struck a deal with O2 in January to resell its mobile service and offer bundled TV-mobile-broadband packages, while people familiar with the matter have said Vodafone Group Plc is considering options including a combination with cable billionaire John Malone’s Liberty Global Plc.

Hutchison is selling 30 percent of the enlarged business, a stake it values at as much as 3 billion pounds, people familiar with the matter said, asking not to be named because the matter is private. Hutchison is in talks with investors including Singapore’s GIC Pte and Canada Pension Plan Investment Board, and has also held discussions with potential partners including Qatar’s sovereign-wealth fund, they said.

Antitrust Scrutiny

O2’s sale will help Telefonica reduce its debt pile, which doubled in the past 10 years as the company expanded across Europe and Latin America. Telefonica in February reported net debt of 45 billion euros.

Telefonica agreed to sell its Irish unit to Hutchison for as much as 850 million euros in 2013.

The next hurdle would be getting the 02 deal past regulators, who are keen to prevent price increases for customers in a market with fewer competitors. Frank Sixt, Hutchison’s finance director, has said the deal’s approval will probably rest with European authorities in Brussels, rather than U.K. officials.

The U.K.’s 83 million mobile customers paid about 15.63 pounds a month on average for a mobile subscription in 2013, 49 pence less than a year earlier, according to a report by the Ofcom regulator. That compares with average monthly bills of about $70 in the U.S., according to GSMA Intelligence.

UBS Group AG advised Telefonica while Moelis & Co. and HSBC Holdings Plc worked with Hutchison.

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