Li Ka-shing's Hutchison to buy Telefonica UK unit for $15.4 billion

By Julien Toyer and Denny Thomas

MADRID/HONG KONG (Reuters) - Li Ka-shing's Hutchison Whampoa Ltd has agreed to buy Telefonica's British mobile unit O2 for up to 10.25 billion pounds ($15.4 billion), as Asia's richest man makes his boldest bet yet to revamp his European telecoms business.

Hutchison already operates the Three Mobile network in Britain, and buying second-ranked O2 from the Spanish group in Li's biggest ever takeover will make it the top mobile operator in the country.

The company made its first forays into European telecoms markets in 2000, but returns from the business have lagged other parts of Li's ports-to-property empire.

Li and his chief dealmaker Canning Fok have doubled down in response, sinking more money into Europe as they look to snap up businesses from operators who have been battered by the continent's debt crisis.

The proposed O2 deal comes just two weeks after the Hong Kong tycoon undertook a major overhaul of his businesses, which will be split into two listed companies, one focusing on property and the second on telecommunications, ports, infrastructure and others.

The revamp will boost Hutchison's acquisition firepower by about $7 billion as it spins off its property assets to Cheung Kong Holdings Ltd.

"The deal indicates that the group is continuously eyeing Europe to seek future growth," said Alex Wong, a director with Hong Kong-based Ample Finance Group.

The marriage of Three Mobile and O2 would mark the latest move towards telecoms consolidation in Britain, where the market is split between four mobile network operators and four separately owned fixed-line and broadband providers.

REGULATORY SCRUTINY

While the deal will attract scrutiny from competition authorities, European regulators have allowed the number of telecoms operators in countries including Austria and Ireland to shrink from four to three through mergers and acquisitions.

"The European Commission has taken a positive view of four- to-three consolidations of mobile in three cases now...and we believe that the precedents that they have set in those transactions will apply for this transaction," Frank Sixt, Hutchison's group finance director, told reporters.

The deal will mark Li's biggest ever acquisition, overtaking Hutchison's $7.5 billion purchase of Britain's Northumbrian Water Group in 2011, according to Thomson Reuters data.

Hutchison shares were briefly suspended ahead of the announcement, and jumped more than 4 percent when trading resumed, outpacing a 1.2 percent rise in Hong Kong's benchmark Hang Seng share index.

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The company said in a statement that it had: "agreed to enter into exclusive negotiations with Telefónica SA over a period of several weeks" for the potential acquisition.

It said it had agreed to pay an indicative price of 9.25 billion pounds, with another 1 billion pounds in "interest sharing payments" should the combined business reach certain cash flow targets.

Hutchison will fund the deal with a 6 billion pounds bank loan. The company is in talks with private equity firms and others to bring in minority partners, who would be offered not more than a 30 percent stake, Sixt added.

In December, former state monopoly BT entered exclusive talks with the owners of EE, Britain's biggest mobile operator.

BT had preferred EE over O2, which was acquired by Telefonica in early 2006 and has about 22 million subscribers.

Reuters reported in November that Hutchison, whose Three is Britain's smallest mobile network, was waiting in the wings to buy whichever group BT spurned.

NEXT STOP ITALY?

Three Group Europe reported total revenue of HK$31 billion ($4 billion) for the six months ended June, 2014, a 3 percent rise from a year ago. Its core earnings, or EBITDA, rose 15 percent to HK$6.5 billion in the same period.

It operates businesses in Italy, Britain, Sweden, Denmark, Austria and Ireland. In Asia, Hutchison has mobile operations in Indonesia, Vietnam and Sri Lanka.

Analysts expect Hutchison to consolidate its Italian operations next. In 2013, it approached Telecom Italia with a proposal to merge their mobile businesses whereby Hutchison would have taken a near 30 percent stake in Italy's biggest phone operator. But the proposal was rebuffed by Telecom Italia's core shareholders.

It then tried to merge its Italian unit 3 Italia with Wind, a subsidiary of Russian telecoms group Vimpelcom, but talks have stalled.

When asked whether the company could move quickly to consolidate Italian operations, Sixt said: "I like to think we can move very quickly in any circumstance. But you have to have achieved the right deal for all sides for anything like this to happen, that was the case in the UK, and that will be the case in relation to Italy."

Last year, Hutchison bought Telefonica's Irish business in a bid to boost its market share, though it still trails behind the market leader Vodafone plc.

Telefonica said in November the British market was a core one for the company, but it had set as higher priority on reducing its big debt pile and protecting a fat dividend.

It also needed fresh cash to consider potential acquisitions in Brazil, its biggest market along with its home country, where it is investing massively to build an optic fiber network. ($1 = 0.66661 pounds) ($1 = 7.7524 Hong Kong dollars) ($1 = 0.8803 euros)