Telefonica offers $44.7b for cellphone firm

LONDON - Spain's Telefonica revealed an agreed 17.7 billion ($44.7 billion) cash bid for cellphone group O2 yesterday, sparking hopes of a bidding battle for one of the sector's top takeover targets.

Telefonica , the world's fifth-largest telecommunications company by market value, said it would pay 200p per share for the British firm - a 22 per cent premium to O2's closing share price on Friday.

Shares in O2, Europe's sixth-largest mobile phone company, surged over 25 per cent to a record 206.75p as the market laid bets on whether Europe's biggest-ever all-cash bid would flush out a counter-offer from former suitors such as Germany's Deutsche Telekom.

"Do I think someone else will come to the table? Absolutely," said Deutsche Bank analyst Gareth Jenkins.

A Frankfurt-based dealer put the chances of a German counter-bid at 50 per cent. Deutsche Telekom declined to comment.

Asked whether O2 expected a counter-offer, its Chairman, David Arculus, said one could never predict the future.

But he told reporters at a Madrid news conference: "The fit between the two companies is extraordinarily good. I don't think anybody else has got as good a fit as this."

An industry source familiar with talks said this was the third time in about three years that Telefonica had cast its eye seriously over O2.

"Talks only started a week ago, but preparations started much longer ago," the source said. "Telefonica came very close twice before, although they never got as far as contacting the other side."

A successful O2 takeover would allow Telefonica to realise a long-held ambition to break into the fiercely-competitive British market, as well as re-entering Germany, which it abandoned in 2002 after failing to build a start-up mobile operation there.

"O2's 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 two of the largest European markets with a sizeable critical mass and it will balance our exposure across business and regions," said Telefonica Chairman Cesar Alierta.

But Telefonica shares fell over 3 per cent to 13.21 ($22.58) by late Monday afternoon (British time) as investors digested the debt-funded deal.

"I don't think you can argue they're going to buy it on the cheap," said Colin Morton, a fund manager at Rensburg Fund Managers who holds O2 shares.

"It's just a case of whether an asset like this is so valuable [and whether] someone else is willing to pay a bit more for it and I think all eyes are really on Deutsche Telekom at the moment."

European telecommunications giants have spent the last three years funnelling their sizeable cashflows into reducing debt. But even after starting to return cash to shareholders again with dividends and share buy-backs, analysts say they have plenty of room on their balance sheets for major acquisitions.

O2, which has about 25 million customers in Britain, Ireland and Germany, is one of only a few independent pure mobile phone operators and has long been tipped as a likely takeover target.

Telefonica's bid for O2, which analysts said was priced at about 8.3 times expected earnings before interest, tax, depreciation and amortisation (ebitda) for 2006, is broadly in line with multiples seen in other European telecommunications deals.

And some analysts say Telefonica could not afford to wait.

It risked being squeezed out of the European market after Deutsche Telekom and Dutch counterpart KPN started exploring a joint takeover of O2 in August, as well as facing fresh rivals at home after France Telecom clinched 80 per cent of Spain's third-ranked mobile group Amena.

Telefonica, which said it hoped to complete the deal in January, plans to fund the acquisition with an 18.5 billion bridge facility underwritten by Citigroup, Goldman Sachs and Royal Bank of Scotland.

Telefonica said the deal would boost earnings per share by 3 per cent in 2006 and 6 per cent in 2007, adding that it would generate an estimated 293 million ($505 million) of annual operating cost and capital expenditure savings by 2008.

The one-off cost of achieving the savings would be 39 million, Telefonica said.

- REUTERS