Sky and Talk Talk are the latest in the frame to buy O2 from Telefonica

Lynsey Barber
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O2 has many suitors (Source: Getty)

Sky and Talk Talk are the latest to join the queue of apparent bidders to snap up UK mobile business O2 from Telefonica.

Talks between the Spanish telecoms firm and Sky and Talk Talk are said to be taking place, according to reports, just days after it was revealed China’s Hutchison Whampoa, the owner of the UK’s fourth largest mobile network Three, was revealed to be in the running.

The move would be the first for Sky into the full “quad play” market by adding mobile to its offering of TV, telephone and broadband, following hot on the heels of rival BT.

BT was previously in the running to snap up O2, 10 years after it sold it to Telefonica. In the end the firm decided to make a £12.5bn bid for Deutsche Telecom’s EE instead, making the move from triple play into quad play.

Analysts at Liberum said it would mean “some sort of capital raise” which would also allow Sky “to maintain financial flexibility over the Premier League rights.” It was also noted that quad play services were not proven in the UK.

From a strategic standpoint, we are not sure this would fix its problem in the UK i.e. slowing growth, a more aggressive competitor in BT (with Virgin Media also becoming more aggressive) and that it does not own its fixed-line infrastructure, which its rivals do. And, as we pointed out before, it is a ‘leap in the dark’ given Quad-play is unproven in the UK (Virgin Media offers a Quad-play service via its MVNO [mobile virtual network operator, or partnership with a mobile operator], but it has not been particularly successful).

Elsewhere, Nomura said a buyout would be a surprise move “given management have said there is limited evidence for mobile becoming a household purchase and that if it did, an MVNO would be the preferred response.”

In addition the company have levered up to over three times for Sky Europe and has promised its shareholders it will focus on deleveraging. Such a move for O2 would require substantial equity issuance.

Talk Talk recently agreed an MVNO deal with O2 to offer mobile services to its customers, switching from Vodafone. In addition to Talk Talk’s purchase of online streaming service Blinkbox from Tesco, it’s unlikely the firm would stretch as far as buying its entire mobile network.

Addressing previous speculation about Sky's conversations with mobile operators, chief executive Jeremy Darroch said in October: ”Look, we talk to the mobile operators all the time, across a whole range of things. You can imagine all the various ways we butt against them. We’re constantly having conversations with them. Everything from distribution of our product to distribution of theirs. So don’t be surprised if you hear about us talking, but don’t assume that that means that we’re going to go and do anything.”

Sky has said when it comes to quad play it was something the company “kept under review” but wasn’t something its customers were particularly demanding. The media company is understood to have recruited Lazard late last year to examine its mobile operations.

Analysts at Banco Espirito Santo said: “We would expect UK players to readjust their market presence in face of the likely acceleration in the take up of convergence and in that sense the potential interest in a standalone mobile operation like O2 UK is not surprising.“

Liberum also suggested the move would push further consolidation in the UK telecoms market with a combination of Vodafone and Liberty Global-owned Virgin Media.

Both Sky and Talk Talk declined to comment on the report in Spanish newspaper Cinco Dias.

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