It was just a matter of time before someone made a move on the British company, so Telefonica’s offer for O2 was no big shock. But there’s still time for other rivals to muscle in on the act, says Ben Griffiths.
Since splitting off from BT four years ago, O2 has persistently found itself unable to tear down the “For Sale” sign planted outside its corporate headquarters in Slough.
As such a small fish in a pond with predators the size of Vodafone, France Telecom and Deutsche Telekom, the company was always going to find it difficult to survive.
Analysts therefore regarded the question of a takeover bid as merely a question of when, not if, and news of an agreed £17.7bn offer from Spanish phone firm Telefonica came as no surprise.
However, despite the 200p-a-share bid ringing up a 22 per cent premium to O2’s Friday closing price, dealers are still rubbing their hands at the prospect of a bidding war. Deutsche Telekom is seen as the rival most likely to pick up the phone.
Earlier this year the German giant was in talks with O2 about making a connection of its own but any fresh attempt by Deutsche is likely to be referred to the Competition Commission due to its ownership of British operator TMobile. Telefonica’s offer, meanwhile, can move ahead unhindered by regulatory concerns.
Mark Burgess, head of active equities at Legal & General Investment Management, said: “If Deutsche Telekom were to come in then they would have to pay a big premium because there would be regulatory risk attached to it.”
Nevertheless, with the Telefonica deal not set to complete until next year, there is plenty of time yet for Deutsche and other bidders to crash the party.
After initial fears that Telefonica may have been paying too much for O2’s 24.6m customers in Germany, Britain and Ireland, analysts noted that mobile companies have come a long way since their days of overpaying for 3G licences.
Content is now much more sophisticated and includes music and video downloads, while data is seen as a strong future revenue generator.
Adam Steiner, head of research at SVG, said: “This is a pretty fair price. We think an alternative bid is more likely from a private equity house than from a trade buyer. Under Takeover Panel rules any private equity house that fancies a sniff around is going to be able to come in and take a look at the books.”
The major gain for Telefonica is that it offers the chance to get into two of Europe’s biggest mobile markets, with a combined customer base of 141m and revenues estimated to be above $26bn (£14.7bn) in each.
Compared with the 38m customers and $18bn of revenues that the Spanish mobile market currently offers, Britain and Germany will turn Telefonica into one of the largest operators in Europe virtually over night.
The Irish market is also not to be overlooked, as it features Europe’s highest average revenue per user figures — industry talk for customer spend.
Additionally, by buying O2 Telefonica will generate £199m of annual operating cost and capital expenditure synergies by 2008 for a one-off cost of €39m (£26m).
But there is another reason for Telefonica wanting this deal.
Marta Munoz, senior analyst at technology and telecom adviser Ovum, said: “Britain and Germany are two of the most advanced markets in Europe. O2 has managed to defend its position well while operating in highly competitive environments. Something Telefonica could learn from, especially now that it faces increasing competition from Vodafone and Orange in its home market.”
O2’s strength also means that Telefonica is keen to keep its brand, high-street retail presence and high-profile sponsorships deals with the likes of Arsenal Football Club and the England rugby team.
Telefonica’s own brand or that of its mobile division Movistar hardly attract the same level of recognition this far north of the Pyrenees. It has been said in the past that O2 was not capable of competing in its own right but the company has proved commentators wrong.
Shareholders are walking away with a decent premium on the back of it and, notwithstanding rival offers, O2’s independent days are numbered.