Shares in British mobile phone group O2 surged 25% today after Spanish telecoms giant Telefonica said it had agreed to buy the group for £17.7 billion sterling, sparking hopes of a bidding battle for one of the sector's hottest takeover targets.
Financially-powerful Telefonica, the world's fifth-largest telecoms firm by market value, said it would pay 200 pence per share in cash - a 22% premium to O2's closing share price on Friday.
A successful O2 bid, the second-largest telecoms offer in Europe since the end of 2000, would allow Telefonica to break into the fiercely-competitive UK market and re-enter Germany, which it abandoned in 2002 after failing to build a greenfield mobile operation there. O2 also has what it calls 'a highly cash generative business in Ireland' with 1.5 million customers.
Peter Erskine, chief executive of O2, who will remain at the group, described the deal as an excellent opportunity for O2, which analysts believe is too small in the current market to survive on its own. 'It's also good for customers. Telefonica have no overlapping territory, so they will be able to offer our customers better roaming and better services around the world,' he said.
'It's very good for our people. Because there's no overlapping territories, we can really build on what we've got, as opposed to having to integrate and rationalise jobs,' he added.
A spokeswoman for O2 Ireland said that there will be no redundancies among the company's 1,600 workers here as the company is being bought as a whole.
'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,' Telefonica's Chairman Cesar Alierta said.
A source close to talks said Telefonica had approached O2 last week and was given access to the company's books over the weekend. Telefonica's bid represents one of the biggest European deals since the telecoms bubble burst. Since then phone companies have focused on balance-sheet repair, shying away from shareholder-friendly growth and acquisitions.
O2, Europe's sixth-largest mobile phone company which owns assets in Britain, Ireland and Germany, is one of the few independent pure mobile phone operators and has long been tipped as a likely target to help trigger a new telecoms gold rush.
Telefonica, the largest telecoms operator in the Spanish-speaking world, last surprised the market in March with a bigger-than-expected $3.57 billion bid for Czech carrier Cesky Telecom.
But when Europe's top former telecoms monopoly Deutsche Telekom teamed up with Dutch peer KPN for an aborted O2 bid in August, and France Telecom clinched 80% of Spain's third-ranked mobile group Amena, analysts said Telefonica risked being squeezed out of the European arena.
Investor hopes were high today that Deutsche Telekom - which had been hoping to fold its struggling T-Mobile UK cell phone business into O2's stronger-performing British arm - would raise its hand and counter-bid.
But KPN, which also saw its solo bid for O2 spurned last year, remained adamant it had no plans to rekindle negotiations.
Telefonica said the deal would immediately boost earnings per share. The firm said it would generate an estimated €293m of annual operating cost and capital expenditure synergies by 2008. The one-off cost of achieving the savings would be €39m, Telefonica said.
A source familiar with the situation said Telefonica would fund the deal using loans provided by Citigroup, Goldman Sachs and Royal Bank of Scotland. The company said it did not expect to issue shares and pledged to continue its share buy-back programme and current dividend policy.
O2 was spun off from Britain's dominant fixed-line telecoms operator BT Group in November 2001. It has around 25 million customers in Ireland, Germany and the UK and some 15,000 employees.
O2 shares closed 25% higher in London this evening at 207 pence sterling.
