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O2 sale talks raise price fears

O2 is set to be snapped up by the owner of rival Three in a £10 billion deal that has raised fears about reduced competition and higher prices.

Hong Kong's Hutchison Whampoa is in exclusive talks to buy the business from Spain's Telefonica in a move which will create the largest player in the market but cut the number of competitors from four to three.

It comes after O2, which started life as BT Cellnet, was spurned by its former parent BT, which is instead pursuing a £12.5 billion deal for current leader EE.

The UK had five major mobile phone operators before Orange and T-Mobile announced the merger in 2009 which would create EE, pushing O2 into second place in the market.

But the move by Hutchison, controlled by tycoon Li Ka-shing, would transform the landscape again, creating a new top dog by adding second placed O2 to fourth-placed Three.

Which? executive director Richard Lloyd said the move must be scrutinised closely by regulators.

He said: "This would be a significant change to the market and one that will need careful consideration by the competition authorities to ensure that consumers are protected from higher prices or poorer service.

"Fewer players in an essential market like telecoms is rarely a good thing for consumers and competition, and both O2 and Three already have work to do to improve their customer satisfaction ratings."

Ernest Doku, telecoms expert at uSwitch.com, said: "If Hutchinson Whampoa pulls it off, the fear is the consolidation of two of the big four UK mobile networks could have a knock-on effect on prices due to a less competitive market.

"But the UK has a reputation as one of the most cut-throat mobile markets in the world, and the move towards quad-play - where phone, broadband, TV and mobile services come from a single supplier - enabled by potential mega mergers like EE and BT, should keep competition fierce in the coming months.

"We must wait to see what the competition authorities in Brussels make of the merger but the EU has approved similar deals in the past. The battle lines for the future of the mobile market are certainly being drawn with these acquisition talks."

Nick Jones, partner and head of technology and telecoms at Cavendish Corporate Finance, said the deal was a bid to secure a leading market position, achieve cost synergies and improve margins.

Hutchison said it had entered talks "over a period of several weeks" to buy O2 for £9.25 billion in cash followed by deferred payments of up to £1 billion.

Telefonica confirmed the talks, saying the deal marked another step in its transformation process which it said would "allow the company to strengthen its financial flexibility".

Industry figures from Espirito Santo show EE as currently the biggest of the mobile phone players with 35.2% of the market followed by O2 on 28.5% - but the latter combined with Three's 8.4% share would see it climb to first place.

Hutchison said the transaction remained subject to due diligence over O2, agreement on terms and signing of agreements, and obtaining the required corporate and regulatory approvals.

Telefonica snapped up O2 for £17.7 billion in 2005. The business had been spun off from BT in 2001.

Its proposed takeover by Hutchison comes as Europe's telecoms firms jostle to reposition themselves amid a consolidation in the sector - with BT's move on EE designed to focus on a convergence between fixed and mobile services.

Vodafone, the number three player in the mobile market, has outlined plans to offer broadband services and has been subject to speculation that it has designs on Sky to strengthen its position in the UK and give it access to TV operations in Europe.

Other reports have suggested a potential tie-up with Virgin Media, as telecoms players look at the opportunities offered by the "quad play" market where customers are offered packages bundling together mobile, fixed line, broadband and TV.

Vodafone has already moved for cable operators in Spain and Germany over the last couple of years.

Meanwhile, Mr Li's move for O2 represents the latest UK acquisition for the tycoon across a range of sectors.

Earlier this week his Cheung Kong Infrastructure group bought train rolling stock firm Eversholt for £2.5 billion.

It will sit alongside his other UK investments which include retailer Superdrug, Northumbrian Water, Southern Water, Felixstowe port and UK Power Networks.

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