Hutchison Whampoa acquires 02 for £10.3bn

Li Ka-shing's Hutchison Whampoa agreed to acquire Telefonica SA's O2 unit, creating the UK's biggest wireless provider by customers and marking a milestone in the billionaire's efforts to remake the Hong Kong conglomerate.

The £10.25 billion price includes an initial sum of £9.25 billion in cash, with the remainder to be paid when certain financial targets are met.

In July 2014 Hutchison Whampoa's mobile subsidiary Three Ireland concluded its € 850m acquisition of O2 Ireland from Telefónica.

O2 said regulatory approval may take a year, while Telefonica said it expects the transaction to be completed by June 2016. Hutchison shares rose in Hong Kong as the deal, reached after two months of exclusive talks, paves the way for merging its Three business with O2 into a mobile carrier with more than 30 million subscribers.

It also furthers Li’s focus on businesses that consumers rely on for basic services, insulating the retail-to-ports group’s income from economic cycles.

"This is a continuation of the company's participation in businesses that relate to daily necessities," said Ben Kwong, a director at brokerage KGI Asia Ltd. in Hong Kong. "They will continue to acquire related business, and over time, when they mature, they may restructure or spin it off."

Telecommunications was Hutchison’s second-biggest business by revenue last year, after retail chains and before ports, according to data compiled by Bloomberg.

Telefonica shares rose 0.1 per cent to 13.66 euros at 9:16 a.m. in Madrid. Hutchison closed 2 percent higher at HK$105.700 in Hong Kong, as the benchmark Hang Seng Index added 0.5 percent.

Li’s empire

The deal will be funded by a £6-billion bridge facility that Hutchison 3G UK Investments has entered into with HSBC Holdings Plc and Hutchison's own cash resources, the company said in a statement to the Hong Kong stock exchange Wednesday.

The deal comes as Li, Hutchison’s 86-year-old chairman and Asia’s second-richest man, is overhauling his business empire before handing the reins to his eldest son Victor Li. Li is merging his two biggest companies and plans to spin off their real estate assets into a separate unit later this year. That hasn’t stopped Hutchison from pursuing other deals as Europe’s telecommunications firms combine to gain more pricing power and amid sluggish economies that restrain the industry’s growth.

In Italy, the company is in talks to merge its local operations with those of VimpelCom Ltd., according to people familiar with the matter.

Betting on Size

Revenue from telecommunications services in Europe will probably decline 1.5 per cent this year after falling 2.2 per cent last year, according to researcher Ovum. Besides mergers and acquisitions, carriers are pushing for more lenient regulation and introducing faster networks.

"They can drive a lot of synergies" with the agreement deal, said James Britton, an analyst at Nomura Holdings Inc. in London. "Whether that really equips them to be fully competitive in a converged UK market remains to be seen." Hutchison's agreement would reduce the number of UK wireless networks to three from four.

Hutchison is betting on size to compete, taking on rivals that are adding services such as TV and internet access to lure customers. The deal “will create a business with unmatched scale and strength that will allow us to better compete against other operators in the marketplace,” Canning Fok, Hutchison’s group managing director, said in a statement. “This very significant investment for Hutchison also reflects our continued confidence in the U.K. economy and its commitment to maintain and foster a dynamic telecommunications sector.” Consolidation With more wireless subscriptions than people, carriers in the U.K. have been busy preparing for consolidation.

Last month, former phone monopoly BT Group Plc agreed to buy Deutsche Telekom AG and Orange SA's mobile venture EE Ltd. for £12.5 billion. BT had also held talks with O2.

Bloomberg