ET Telefonica SA, the Spanish telecommunications powerhouse that has
been expanding in Latin America and Eastern Europe, has agreed to buy
mobile phone company O2 PLC in a $31.4 billion deal that will help
expand in the United Kingdom and German markets.
The Spanish company said Monday it has agreed to pay 200 pence ($3.55)
per share in cash for O2 shares, a 22 percent premium over their
closing price on Friday. The O2 board recommended that shareholders
accept the offer.
Telefonica Chairman Cesar Alierta said the deal will boost the
company's capacity for growth and balance its exposure regionally,
giving it more assets in Europe after a recent expansion in Latin
America.
"It accelerates Telefonica's already beneficial growth prospects,
widening the gap with our peers," he said. "We are entering in the two
largest markets in Europe with critical mass."
The combined company will have 116 million mobile phone users and a 16
percent market share in terms of revenue in Europe's top five mobile
phone markets.
It will have 170 million customers globally including fixed-line
users, compared to Vodafone Group PLC which has over 165 million
mobile customers, France Telecom which has 70 million mobile
customers, and Deutsche Telekom -- which had previously shown interest
in O2 -- with over 80 million mobile customers.
Peter Erskine, chief executive of O2, said the geographic operating
differences between the two companies was a strong reason for
recommending the deal.
"It's ... good for customers. They have no overlapping territory, so
they will be able to offer our customers better roaming and better
services around the world," Erskine told British Broadcasting Corp.
radio.
Alierta said that the proposed acquisition will boost earnings from
year one. Earnings per share are expected to increase 3.5 percent next
year and 6 percent by 2007, he said on a conference call to analysts.
Shares of O2 surged 26 percent to 206 pence ($3.65) while Telefonica
shares fell 2.8 percent to 13.24 euros ($15.91).
Investec Securities said it was possible that former suitor Deutsche
Telekom could make a counterbid. Investec said the synergies available
to Deutsche Telekom within Britain are significantly higher than those
available to Telefonica and subsequently, the chances it will bid are
high. Deutsche Telekom has not commented.
Dresdner Kleinwort Wasserstein said that proposed annual synergies of
293 million euros ($353 million) "seems conservative" and that
Telefonica's flexibility will be affected. It said that,
strategically, it is a questionable deal but will help earnings per
share and cash flow.
"It is now up to Telefonica to prove that it can create value," Dresdner said.
The deal follows Telefonica's $3.32 billion acquisition of a majority
stake in Czech operator Cesky Telekom earlier this year. Last year it
acquired BellSouth Corp.'s Latin American assets for $5.9 billion.
O2 was created in 1971 from the mobile telephone operation of BT PLC,
Britain's largest telecommunications company. The company and its
subsidiaries now provide service to nearly 25 million customers in
Britain, Ireland and Germany, where it says it is the fastest-growing
mobile telephone operator.
Telefonica had around 145 million customers in June and 173,000 employees.
Alierta said he did not foresee any regulatory issues to impair the
transaction and would not comment on whether Telefonica would increase
its bid should a rival offer emerge, calling such a scenario purely
hypothetical.
He said the company expected to post the offer document formally in
November and close the deal in January.
Alierta said Telefonica is unlikely to make further acquisitions or
disposals, adding it is unlikely to pursue a formal bid for Tunisie
Telecom, the African operator it had previously considered buying.
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