Market Insight

Telefonica sells O2 Ireland to Hutchison 3 in an effort to reduce debt

June 23, 2013


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Spanish telecoms conglomerate Telefonica is selling its Irish subsidiary to Hong Kong based Hutchison Whampoa, owner of the 3 group of operators. The sale is initially valued at €780m with an additional €80m to follow if certain revenue targets are met. Telefonica stated that the sale is part of an effort to pay close to €7bn of its debt by the end of the year. The combined business will have just over two million subscribers which represent a 37.5% share of the Irish mobile market. Despite O2's larger share in the market, Hutchison said the O2 brand will be phased out over the next two years.

On the face of it, Hutchison 3 got a very good price for O2 Ireland. O2 just spent €125m on mobile spectrum at the end of 2012, renewing its 2G licences as well as acquiring new spectrum for 4G services. This includes valuable 800MHz spectrum which 3 Ireland missed out on. O2 is also the only other Irish operator besides 3 with over half its subscribers on postpay plans. This should help 3 manage the transition better and reduce any churn related to teething difficulties from merging the companies.

There are some concerns for 3 though. O2 Ireland recorded an OIBDA margin (operating income before depreciation and amoritization) of 20.7% in 2012; significantly lower than Telefonica's overall European OIBDA of 34.1%. Quarterly average revenue per user for O2 Ireland has declined 40% since Q1 2008. The timing of the deal may also prove problematic as the deal is unlikely to close prior to both networks spending significantly to roll out 4G services. In addition to needing to decommission many of these new cell towers next year when merging networks; O2 Ireland and 3 Ireland will have very different 4G technology and rollout strategies due to differences in spectrum holdings.

It is likely that the Irish telecoms regulator Comreg will review the transaction and 3 Ireland should expect to give up some of its newly acquired spectrum. This most likely applies to the 2100MHz band where O2 and 3 account for half of all licensed spectrum. With Vodafone and 3 now being in dominant positions in the market, the regulator may demand some concessions towards the smallest mobile network operator; Eircom or possibly setting aside some spectrum for a new entrant.

If the deal meets with regulatory approval, Ireland could be the first European country where Hutchison 3 takes a market leading position. Since launching its assault on Europe in the early 2000s, no Hutchison 3 operator has exceeded 15% market share. Hutchison boosted its market share in Austria to nearly 30% by purchasing Orange Austria last year. There were also rumours earlier in 2013 that Hutchison would move for Telecom Italia's mobile business. While IHS believes that Hutchison takes a very pragmatic approach to its investment decisions, with many European operators struggling with debt, more opportunities may present themselves for Hutchison 3.

For Telefonica, this deal will presumably be the first of several divestments this year. It reported a net debt of €53.8bn at the end of Q1 and aims to reduce that to €47bn by the end of the year. O2 UK could be next up for sale. Telefonica floated its German operation last year, and its business in the Czech Republic and Slovakia would not be large enough to hit that debt target. It would also prefer to hold on to its Latin American portfolio. Aside from being the most disposable asset, O2 UK has the lowest reported OIBDA of Telefonica's remaining business units.

 

Geography
Europe Ireland
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