ACQUISITIONS

Li Ka-shing’s conglomerate agrees to HK$118 billion takeover of Britain's O2 mobile network

Deal may be completed by next year, pending EU competition authority's approval

PUBLISHED : Wednesday, 25 March, 2015, 11:15am
UPDATED : Thursday, 26 March, 2015, 1:07am

Hutchison Whampoa, the flagship conglomerate of billionaire industrialist Li Ka-shing, has agreed to buy the British mobile network operator O2 from Spain’s Telefonica for £10.25 billion (HK$118.29 billion or US$15 billion).

The blockbuster deal represents Li’s biggest overseas acquisition, surpassing the £5.77 billion paid by Cheung Kong Infrastructure to take over UK Power Networks in October 2010.

The acquisition of O2, which is subject to the European Union competition authority’s approval, will create the biggest mobile network operator in Britain, with almost 33 million customers as it combines the subscribers of Hutchison’s Three UK subsidiary.

Hutchison managing director Canning Fok Kin-ning expected the deal to be completed, with all regulatory approvals, by next year.

“The combination of Three UK and O2 UK will create a business with unmatched scale and strength that will allow us to better compete against other operators in the marketplace,” Fok said.

“This very significant investment for Hutchison also reflects our continued confidence in the UK economy and its commitment to maintain and foster a dynamic telecommunications sector.”

Under the terms of the deal, Hutchison will pay £9.25 billion at closing. A deferred upside interest-sharing payment of up to £1 billion will be made when certain agreed financial thresholds of the merged mobile network operator are met.

David Dyson, the chief executive of Three, said: “The highly complementary network assets will deliver market leading coverage and capacity for talk, text and data and will be well-placed to satisfy rapidly growing demand.”

The negotiations to purchase O2, which was announced in January, followed efforts by Li to restructure his two conglomerates, Hutchison and Cheung Kong.

A new conglomerate called CK Hutchison Holdings will hold all non-property businesses, including telecommunications, retail, infrastructure, energy, aircraft leasing, and ports and related services. Property businesses will be grouped under Cheung Kong Property Holdings.

Fok has assured that the company’s strategy in Europe would continue under Li’s reorganised business empire.

“In Europe, we are doing telecommunications consolidation. This is a top priority for us,” Fok said in January. “We’ve done two [acquisitions in the continent]. There’s some more to come.”

The combination of Three UK and O2 UK will create a business with unmatched scale and strength
Hutchison managing director Canning Fok Kin-ning

Analysts expect the O2 UK takeover to face sharp scrutiny from the European Commission.

“The commission has followed a relatively steady pattern when it has previously looked at four-to-three mobile telecoms deals,” said Francesco Liberatore, a London-based associate at international law firm Jones Day and an expert in competition laws.

“[It] involves a long, in-depth investigation, hearing from third parties and several national regulators, and working to solve concerns over retail price rises, accumulation of too much radio spectrum in contiguous high-speed frequency bands, wholesale mobile network access and coordinated effects,” he explained.

“The commission will need to look at this case on its own merits considering particular features of the UK market, but it wouldn’t be surprising if the parties had to address concerns over spectrum and beef up the terms on which they offer network access to other operators.”

A potential reallocation of spectrum – the radio frequency bands over which mobile network services are provided – may be the focus of the review, based on the potential combination of Three and O2 assets.

The merger may also be complicated because both Three and O2 have existing network-sharing deals with competitors: O2 with Vodafone and Three with EE.

Hutchison’s “3 Group Europe” telecommunications operations — comprising Italy, Britain, Sweden, Denmark, Austria and Ireland — had 26.9 million customers as of June 30 last year.