Spain’s Telefonica SA on Monday agreed to buy British mobile phone operator O2 for $31.5 billion, continuing a wave of consolidation in the European telecommunications industry. Telefonica said it was paying 17.7 billion pounds, or 200 pence a share in cash, to gain a foothold in the U.K. and Germany. The offer price represents a 22% premium to O2′s closing price of 164.25 pence a share on Friday and is expected to add to earnings per share and free cash flow immediately.
O2 shares were recently up 25% at 206 pence a share, higher than the offer price, suggesting another bidder might emerge.
Telefonica shares were suspended in Madrid.
As one of the few independent and pure players in the mobile industry, O2 had long been tipped as a likely takeover target. Earlier this year O2 was the subject of an aborted bid from Deutsche Telekom AG and Dutch carrier KPN, with Deutsche Telekom eyeing O2′s U.K. arm while KPN was looking to buy its German operation. Madrid-based Telefonica had also been looking for an acquisition in Europe; a Wall Street Journal report earlier in the year linked it to a possible bid for KPN.
The Telefonica-O2 deal comes on the heels of two rival groups of private-equity firms vying to acquire Denmark’s TDC, and in July, France Telecom paying 6.4 billion euros for Spanish mobile operator Amena.
Ireland’s Eircom also has been reported to be a bid target.
The transaction would be the largest in the industry since the $35 billion acquisition of Nextel Communications by Sprint in December 2004.
The deal fits with the Spanish telecommunications company’ efforts to expand in Europe after years of building its business in Latin America. Telefonica has spent more than $50 billion in acquisitions in the region since the 1990s.
Telefonica’s mobile-phone division, Telefonica Moviles SA, has more than 90 million customers in 15 countries. The cellular operator derives about half of its sales from Spain and much of the rest from Latin America.
“O2′s integration in the Telefonica group will enhance our growth profile, it will allow us to gain economies of scale, it will open the group to the two largest European markets with sizeable critical mass and it will balance our exposure across business and regions,” said Telefonica Chairman Cesar Alierta.
Telefonica, the world’s fifth-largest telecommunications company by market value, is forecasting of 296 million euros in annual cost savings by 2008. O2 was spun out of BT Group PLC, the United Kingdom’s largest traditional phone-service company, in 2001. Based in Slough, England, O2 has 15,000 employees and 24.6 million mobile-phone customers in the U.K., Ireland and Germany.
O2′s current management will continue to run the business.