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TELECOM & INTERNET | Staff Reporter, Hong Kong

Hutchison Whampoa announces potential O2 UK purchase worth GBP10.25bn

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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