Spanish Incumbent Aims for Scale
by Ouida Taaffe | Mon, October 31. 2005
Telefonica, the Spanish incumbent, has made an all cash offer of c. £17.7 bn to acquire O2, the mobile operator that has operations in the UK, Germany and Ireland. This total reflects an offer per share of 200 pence.
“We believe that the offer to O2 shareholders is very attractive,” said Cesar Alierta, the CEO of Telefonica during a conference call. Alierta it represents a 22 per cent premium to the middle market price of an O2 share as of close of business on October 28, 2005 and that it was in cash, - rather than stocks, or a mix of instruments.
As this emphasis by Alierta suggests, the closure of the deal still depends on shareholder and regulatory approval. A number of analysts have argued that other bids for O2 could emerge. However, when asked during the conference call whether today’s bid is final – i.e. whether Telefonica would up its offer if other bidders emerged – Alierta said that there is currently no other bidder.
Morten Singleton, an analyst with WestLB in London, believes that the all-cash nature of the deal will be very attractive to shareholders and could deter a counter-bid.
The Telefonica offer follows many months of rumours about possible moves on O2. KPN, the Dutch incumbent, and Deutsche Telekom, the German incumbent, confirmed in August that they had held preliminary discussions on a joint take-over of the company. The attraction for KPN would have been O2’s German business. (KPN has an existing mobile operation in Germany – E-Plus – but this is expanding as a wholesale base for a number of MVNOs, rather than as a consumer play in its own right, and it is thought unlikely that a merger of O2 and E-Plus would have hit regulatory barriers. As of end of Q2, 2005, E-Plus had 13.2 per cent of German subscribers using its network and O2 had 11.3 per cent.) What DT could have gained from purchase of part of O2 is greater scale in the UK market where it finds itself pushed toward the wholesaler role.
If its offer for O2 is accepted, Telefonica will be able to enter both the UK and the German markets with what was described by Alierta as “critical mass”. The rationale for the move was that “the [merger would represent] the best combination of growth and cash returns in the industry”. Telefonica expects it to be “accretive” from year one.
This is not Telefonica’s first foray into the German market. The Spanish incumbent intended to set up as a German greenfield UMTS operator in 2000, buying a UMTS licence together with Sonera, the Finnish incumbent, which later withdrew from the arrangement. The licence, which cost over E8 bn and is held by an entity called Quam, was withdrawn by the German regulatory authorities at the end of 2004. Quam has appealed against this and the case is on-going, according to the regulator’s office. German UMTS licencing agreements stipulate all licence holders are required to offer UMTS coverage to 25 per cent of the German population by the end of this year. As things stand, Quam offers no services. Further, according to a spokesperson at the regulator’s office, no company can hold two German UMTS licences as this would be deemed anti-competitive. If Telefonica acquired O2, it would, effectively, hold two German UMTS licences.
In terms of broader market developments, Alierta argues that “scale is becoming increasingly important in the telecom industry”. The merger would “more than double” Telefonica’s European handset and equipment purchasing, Alierta said – the implication being that Telefonica would thus be in a better position to demand economies. He would not be drawn on what plans Telefonica might have for further acquisitions, saying only that they would be considered “if an attractive partner or target became available”.
There are several smaller mobile operators in the European market, including Swisscom, Telekom Austria and – arguably – KPN that are thought to be looking for greater scale themselves.a What impact the emergence of a more powerful Telefonica will have on them is not yet clear.