Li Ka-shing-controlled Hutchison Whampoa has agreed to pay up to £10.25 billion ($15.2 billion) for UK mobile phone firm O2.
The deal announced on Wednesday with Spanish parent Telefonica will create the UK's biggest mobile operator, once O2 is merged with Hutchison 3G UK, and marks Hutchison Whampoa's largest acquisition ever, as Hong Kong's richest man Li doubles down on investments in Europe.
The 86-year old Li has been seeking to redeploy money from Hong Kong to regulated assets in developed markets. Other acquisitions in recent years include UK rail rolling-stock owner Eversholt Rail Group, Orange Austria, and Northumbrian Water. He also bid unsuccessfully this year for Fortum's Swedish power grid.
The O2 agreement comes about two months after Hutchison Whampoa entered into exclusive negotiations with Telefonica for the potential acquisition of O2. The deal has an indicative price of £9.25 billion, to be paid up front, and "deferred upside interest sharing payments" that could add a further £1 billion once the cash flow and combined businesses of Hutchison 3G UK and O2 UK reach an agreed threshold.
The merged telecoms company will have scale, with almost 33 million customers, and comes as the group seeks to consolidate some of its other telecom assets. According to reports, Hutchison and Vimpelcom are in advanced discussions to merge their mobile operations in Italy.
Hutchison's move also comes at a time when the UK mobile phone market is consolidating after legacy telco and former O2 parent BT last month agreed to buy rival EE.
"This combination [with O2] will provide our business with the scale and financial strength necessary to be an even more effective and aggressive competitor in the rapidly evolving UK telecommunications sector," Canning Fok, Hutchison Whampoa's group managing director, said in a release.
Sharing the risk
Hutchison Whampoa said in January that they could share the risk of buying O2 with other partners – at that time group finance director Frank Sixt said they would ask private equity players to join in the deal, though they will not take a stake larger than 30%.
Hutchison Whampoa has not revealed any details of who the potential investors might be but, according to a source familiar with the matter, the company is in discussions with investors including sovereign wealth funds and private equity firms.
The main objective, though, is to get the deal through the regulators first. Anti-trust regulators have become increasingly influential in determining if deals go through and, according to the source, the Brussels regulator will have a key say in the matter.
"A key piece is the regulatory review and bringing in these investors only makes sense after a deal is closed," the source said. "There are a series of discussions going on with investors and a preference for sovereign wealth and pension funds given that they are longer-dated in terms of their investment profile."
Hutchison Whampoa hopes to complete the deal in 2016.
According to reports, Singapore's GIC, Canadian pension funds, and Qatar's sovereign wealth fund are among those that are in talks with Hutchison Whampoa.
Li has previously struck deals with Singapore's state investment firm, Temasek Holdings. Hutchison Whampoa last year sold a 25% stake in AS Watson to Temasek Holdings. Earlier this week, Li also expressed condolences on the death of Singapore's founding father Lee Kuan Yew.
The unaudited net asset value of the O2 UK business was to £6.9 billion as at December 31, 2014. The company also made unaudited net profits in 2013 and 2014 of £303 million and £290 million, respectively.
The O2 purchase coincides with Li's overhauling of his two flagship companies, Cheung Kong Holdings and Hutchison Whampoa into two new companies. CK Hutchison Holdings (CKH Holdings) will hold all his non-property interests, becoming a multinational conglomerate with assets ranging from telecoms and ports to infrastructure assets, while CK Property Holdings will hold the property businesses.
The move will bring assets including Chinese properties that were previously not consolidated on the balance sheet and lend greater clarity to the group. It has unlocked value with the share prices of the flagship companies rising since then.
However, sources dealing with the group have said that the re-organisation is also driven by succession issues and the need to pave the way for different individuals to have roles in Li's stable of companies.
CK Hutchison's share price closed 2.18% up at HK$154.70 on Wednesday..
HBSC and Moelis are joint advisers to Hutchison on the acquisition and HSBC is sole provider of a £6 billion loan financing. UBS is advising Telefonica.
