“Telefonica S.A has announced, through its financial advisor Goldman Sachs, the launching of an Irrevocable Takeover Offer to acquire the total share capital of the UK company, O2 plc.”
With these words, issued on Monday 31 October to the Spanish Securities Market, the Spanish operator finally set light to a story that has been smouldering for months — the possible acquisition of O2.
Telefonica said it had structured a cash purchase of £17.7120 billion, valuing O2 shares at 200p, a 22% premium on their closing value on Friday 28 October of 164p. The deal will go ahead as log as regulatory clearance is achieved, and as long as Telfonica gets not less than 90% of the share capital, or at least more than 50% of the voting share capital.
Telefonica said the O2 board would be recommending the sale to its shareholders. However, the shareholders themselves may have taken a different view, as shares in the company accelerated to over 200p, with many investors taking the view the Spanish operator’s statement may precipitate an auction for O2. Some analysts quickly said DT could outbid Telefonica’s cash offer with a joint shares and cash offer. But many countered the regulatory situation was less clear for DT, with its T-Mobile businesses having strong market share in the UK and, of course, German markets.
DT then moved later in the week to scotch the suggestion, issuing a brief statement putting an end to the speculation.
“Deutsche Telekom AG confirms its earlier statemen that it is not making a counter-offer for O2 as this would not be in the interest of DT’s shareholders.”
As for the reasons for the acquisition, Goldman Sach’s and CitigGroup’s joint statement to the London Stock Exchange said the deal would enhance Telefonica’s economies of scale by giving it operations in Germany and the UK, and generate an estimated run-rate of EUR 293 million (£199 million) of quantified annual operating cost and capital expenditure synergies by 2008.
O2 will retain its existing brand and will continue to be based in the UK. O2’s operating business will be led by the current management and Sir David Arculus and Peter Erskine will join the Board of Directors of Telefonica, the bid statement said.
The Chairman of Telefonica, Mr. Cesar Alierta said, “O2 is an excellent company that, driven by a top class management team, has been able to become one of the highest growth mobile operators in Europe. Its integration in the Telefonica group will enhance our growth profile, it will allow us to gain economies of scale, it will open the group to the two largest European markets with sizeable critical mass and it will balance our exposure across business and regions.”
Commenting on the Offer, Peter Erskine, the Chief Executive of O2, said: “Since the emergence of O2 as a listed company in 2001, it has enjoyed considerable operational success and, in the process, delivered real value to shareholders. This transaction brings together two companies which are growing strongly with highly complementary geographical activities.”
One item that has escaped comment around the deal is that O2 has recently launched i-mode in the UK and Ireland, with a German launch to follow. Telefonica has an i-mode service in its home Spanish market. T-Mobile (Deutsche Telekom’s mobile subsidiary) has no i-mode licences, although putative bid partner KPN has launched the NTTDoCoMo technology in The Netherlands.
Another issue that has raised its head is of brand management. Stuart Whitwell, Joint Managing Director of Intangible Business, a specialist in brand valuation, said””Scale is one of the key factors in the mobile communications industry. The integration of O2 into Telefonica’s portfolio gives the latter access to not only a valuable network of customers across three new territories, but also access to a very valuable brand.
“Although it is currently denied by Telefonica, one of O2’s best potential qualities is that its brand and name translate well internationally. This would be a great access point to the US and Japanese markets.”
l O2 has launched a live, commercial HSDPA service through its Manx Telecom opeation. The service, uses Sierra Wireless’ HSDPA data cards and network equipment from Lucent. Lucent’s director of technical solutions Ranji Rajagopalan said the Manx network was a 31 node B network. Manx had no existing UMTS network, and went to HSDPA in the same step it built its underlying UMTS network. A core upgrade to IMS is due in 2006.