Hutchison Whampoa continues revamp with $19.9b deal for O2

O2 said regulatory approval may take a year, while Madrid-based Telefonica said it expects the transaction to be completed by June 2016. Photo / Thinkstock

Li Ka-shing's Hutchison Whampoa agreed to acquire Telefonica's O2 unit in the UK, intensifying a push into businesses that provide stable income as the billionaire continues his efforts to remake the conglomerate.

The £10.25 billion ($19.9 billion) price includes an initial sum of £9.25 billion in cash, with the remainder to be paid when certain financial targets are met, Telefonica said yesterday.

O2 said regulatory approval may take a year, while Madrid-based 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 to create the UK's largest wireless provider with more than 30 million subscribers. It also further's Li's focus on businesses that consumers rely on for basic services, insulating the retail-to-ports conglomerate'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 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.

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

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 currently in talks to merge its local operations with those of VimpelCom, according to people familiar with the matter.

Revenue from telecommunications services in Europe will probably decline 1.5 per cent this year after falling 2.2 per cent last year, said 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 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," said Canning Fok, Hutchison's group managing director.

With more wireless subscriptions than people, carriers in the UK have been busy preparing for consolidation. Last month, former phone monopoly BT Group agreed to buy Deutsche Telekom and Orange's mobile venture EE for £12.5 billion. BT had also held talks with O2.

Pay-TV provider Sky struck a deal with O2 in January to resell its mobile service and offer bundled TV-mobile-broadband packages, while people familiar with the matter have said Vodafone Group is considering options.