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May 23, 2016

O2 mulls IPO as Telefonica regroups after failed Three mobile deal

News: What next for O2 after failed Three buy-out?

By Alexander Sword

Executives at O2 are considering the operator’s next move after a planned £10.25bn buy-out was rejected by the European Commission, with a stock market float possibly emerging as the preferred option.

The deal, which would have seen Three owner Hutchinson Whampoa buying the network, was blocked by Competition Commissioner Margrethe Vestager, who decided that UK mobile customers would have less choice and pay higher prices as a result of the take-over.

City A.M. and the Irish Independent have both cited sources saying that a stock market floatation is being "strongly" considered.

However, O2 is also receiving offers from private equity firms, including KKR, TPG, Bain Capital, Apollo, CVC Capital Partners and Apax Partners, according to the Telegraph.

Kester Mann, Principal Analyst at CCS Insight, said that he believed that this was the most likely outcome.

He said that a buy by Liberty Global, the owner of Virgin Mobile, was also a possibility, especially considering that Liberty Global bought Belgian operator in Base in 2015.

Other possibilities he cited included a buy-out by a non-UK operator such as SoftBank or America Movil or, less likely, an acquisition by a company not operating in the telecoms sector.

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He said that Telefonica could allow O2’s UK management to become more involved in decision-making and strategy.

Sky may also play a role in a deal as it seeks to launch its own mobile service this year.

Affecting the decision over what O2 does next will be the reasons for the planned sale to Three in the first place.

From a financial perspective, Telefonica’s sale of O2 was aimed at reducing the high debt burden created by a series of acquisitions over the last decade.

This has included acquisitions in Columbia, Brazil, Germany, Israel and Spain.

The O2 assets in the UK, Germany and Ireland were bought by Telefonica in 2006, but with the exception of those in the UK have now been sold off.

At the end of the 2015 financial year, Telefonica’s net debt was at €49.9bn, a leverage ratio of 2.91 times Oibda. The O2 sale would have reduced this to 2.38 times.

Mann says that Telefonica’s core strategy seems to be centred on the core markets of Spain, Germany and Latin America, as opposed to the UK, "a market with strong competition and low margins."

Strategically, O2 faces an uncertain future as a pure-play mobile operator in the UK, when other operators are moving towards being able to offer packages of multiple services.

Rival EE was acquired by BT earlier this year, which gives the combined player a foothold in both the mobile market but also broadband, fixed line and pay-TV.

Meanwhile, Vodafone is building its own base of broadband customers.

O2 CTO Brendan O’Reilly told CBR in August that quad-play had not been as widely adopted as expected and that the
"Being the best mobile operator is the best way to compete with other mobile operators, whether they have other plays or not," he said.

News on O2’s next move will follow in coming months, since the talks are at early stages.

"For the time being, Telefonica, under its new chief José María Alvarez-Pallete, may elect to hold on to an asset that in recent years has impressively outperformed rivals despite its uncertain future," said CCS Insight’s Mann.

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