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August 16, 2005

Deutsche Telekom and KPN admit O2 interest

Two European carriers have admitted to trying to form a partnership in order to acquire the third-placed UK mobile operator O2 Plc, the former wireless arm of BT Group Plc.

By CBR Staff Writer

Royal KPN NV, the largest telecoms carrier in the Netherlands, and Deutsche Telekom AG, Europe’s largest fixed-line carrier, both issued statements confirming market speculation that they had been in discussions regarding a partnership but talks ended without agreement on an offer for the UK-based mobile operator.

Slough, UK-based O2 operates in the UK, Ireland, and Germany, and is Europe’s sixth largest mobile phone company, with a total of 24.6 million customers (14.6 million in the UK). During the last quarter it added 646,000 customers to the group, and financially speaking, the operator is a healthy company. For the year ending March 31, it posted net income up 81.3% at GBP301m ($553.2m) on revenue 17.5% higher at GBP6.89bn ($12.7bn).

There is some concern however that due to O2’s limited market reach, it lacks the scale to compete against some of the more global players such as Vodafone Group Plc and France Telecom’s Orange SA. These concerns have meant that the UK operator has been constantly at the center of takeover speculation, especially after it rebuffed a takeover offer from KPN in February 2004. KPN has long been viewed as offering a good fit with O2, especially if it were to combine O2’s strong presence in Germany with KPN’s German division E-Plus.

KPN’s E-Plus mobile phones business in Germany has been losing market share, while O2 continues to grow in the country, adding 412,000 new customers during the second quarter compared with E-Plus’s 146,000.

Deutsche Telekom was forced to reveal it had held private talks with its Dutch counterpart, after regulators requested that it declare its intentions following a number of press reports about a possible takeover. The offer for O2 was said to be in the GBP14bn ($25.35bn) region, with KPN thought to have taken O2’s German operation, leaving the UK and Irish business to Deutsche Telekom.

At the request of the panel on takeovers and mergers, DT confirms it has no present intention of making an offer for O2, Deutsche Telekom said in a prepared statement.

KPN confirms that it was approached by DT regarding the possibility of KPN acquiring the German business of O2, in the context of an offer for O2, said the Dutch carrier. The discussions with DT, which were of a preliminary nature, are no longer taking place.

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Under UK merger rules, these declarations mean that DT and KPN are prevented from making fresh approaches to O2 for a period of six months unless a third party comes in with a formal offer of its own.

Shares in O2 fell on the London Stock Exchange by 2.5% to 142.75p ($25.83), as of 4.10pm BST on Wednesday.

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