What does this mean for Hutch?
Hutchison Whampoa has recently announced potentially buying O2 UK for GBP10.25 bn.
According to a research note from Nomura, Hutch, the 4th-largest player in the UK mobile market, has announced that it has entered into exclusive negotiations with Telefonica (TEF SM) for the potential acquisition of the latter’s O2 UK (2nd-largest) over several weeks.
The report noted that consideration comprises two parts: (1) £9.25bn cash, which would be paid at closing, and; (2) deferred upside interest sharing payments of up to a further £1bn in aggregate, payable after the cumulative cashflow of the combined 3 UK / O2 UK entity has reached an agreed threshold.
Nomura also said that Telefonica bought O2 UK in 2006 for GBP17.7bn, so Hutch is now paying 42% less compared with nine years ago.
Telefonica has been attempting to sell assets since 2013 to reduce its debt levels, including the sale of its O2-Ireland unit to Hutch in 2013.
Here's more from Nomura:
Impact – Hutch to become UK’s largest mobile operator; earnings accretive (6% initially, with an additional 11% post-synergies) - No.1 in the UK – If the deal materialises, Hutch will leapfrog to become UK’s largest mobile operator with 41% market share.
By eliminating one player, the UK market will be consolidated into only three major players, which should bode well for the industry’s profitability.
Earnings accretion likely – Hutch is likely to enjoy revenue and cost synergies from a much more consolidated market. Hutch’s merger experience in Austria in 2012 (acquiring Orange Austria) was a good example of such benefits from bigger scale and cost synergies, where its EBITDA margin improved from 14% pre-merger to 24% post-merger (in local currency terms).
We estimate the O2 UK acquisition could enhance Hutch’s EBIT by 6% pre-synergies, and an additional 11% post-synergies.
Italy next? – Italy remains the only European mobile market where Hutch has yet to generate positive free cashflows. Profitability has been hovering around the EBIT-breakeven level in the past and worsened to negative EUR71mn of LBIT in 1H14.
If Hutch can turn around the Italy business via a merger, this would help to clear the last major overhang within Hutch’s 3 Group Europe division.
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