Telefonica announces 17.7 billion pound takeover of U.K. mobile operator O2 PLC

Monday, October 31st 2005, 10:14 am

By: News On 6

LONDON (AP) _ Telefonica SA announced Monday it has agreed to buy mobile phone company O2 PLC in a 17.7 billion-pound (euro26 billion; US$31.4 billion) deal that will help expand its presence in the U.K. and German markets.

The Spanish company, one of the world's largest telecommunications companies, agreed to pay 200 pence (euro2.94; US$3.55) per share in cash, a 22 percent premium over O2's closing price on Friday. The O2 board recommended that shareholders accept the offer.

Telefonica Chairman Cesar Alierta said the deal will boost the company's growth profile and balance its exposure regionally, giving it more assets in Europe after a recent expansion in Latin America.

``It accelerates Telefonica's already beneficial growth prospects, widening the gap with our peers,'' he said. ``We are entering in the two largest markets in Europe with critical mass.''

The combined company will have 116 million mobile phone users and a 16 percent market share in terms of revenue in Europe's top five mobile phone markets.

It will have 170 million customers globally including fixed-line users, compared to Vodafone Group PLC which has over 165 million mobile customers, France Telecom which has 70 million mobile customers, and Deutsche Telekom _ which had previously shown interest in O2 _ with over 80 million mobile customers.

Peter Erskine, chief executive of O2, said the geographic operating differences between the two companies was a strong reason for recommending the deal.

``It's ... good for customers. They have no overlapping territory, so they will be able to offer our customers better roaming and better services around the world,'' Erskine told British Broadcasting Corp. radio.

Alierta said that the proposed acquisition will boost earnings from year one. Earnings per share are expected to increase 3.5 percent next year and 6 percent by 2007, he said on a conference call to analysts.

Shares in O2 surged 26 percent to 206 pence (US$3.65; euro3.04) while shares in Telefonica fell 2.8 percent to euro13.24 (US$15.91).

Dresdner Kleinwort Wasserstein said that proposed annual synergies of euro293 million (US$353 million) ``seems conservative'' and that Telefonica's flexibility will be affected. It said that, strategically, it is a questionable deal but will help earnings per share and cash flow.

``It is now up to Telefonica to prove that it can create value,'' Dresdner said.

Investec Securities said it was possible, despite the high offer price, that former suitor Deutsche Telekom could make a counterbid.

Investec said the synergies available to Deutsche Telekom within Britain are significantly higher than those available to Telefonica and subsequently, the chances it will bid are high. Deutsche Telekom has not commented.

The deal follows Telefonica's euro2.75 billion (US$3.32 billion) acquisition of a majority stake in Czech operator Cesky Telekom earlier this year as it expands in Europe. Last year it acquired BellSouth's Latin American assets for US$5.9 billion.

Alierta said he did not foresee any regulatory issues to impair the transaction and would not be drawn on whether Telefonica would increase its bid should a rival offer emerge, calling such a scenario purely hypothetical.

He said the company expected to post the offer document in November and close the deal in January.

Alierta said Telefonica is unlikely to make further acquisitions or disposals, adding it is unlikely to pursue a formal bid for Tunisie Telecom, the African operator it had previously considered buying.

Telefonica had around 145 million customers in June and 173,000 employees.

O2 was created in 1971 from the mobile telephone operation of BT PLC, Britain's largest telecommunications company. The company and its subsidiaries now provide service to nearly 25 million customers in Britain, Ireland and Germany, where it says it is the fastest-growing mobile telephone operator.