Three owner agrees to buy O2 for £10.25 billion

Three's parent company is planning on buying O2, in a deal that could shake the foundations of the UK's mobile industry.

Hong Kong-based Hutchison Whampoa, which owns Three, has offered to pay Spanish company Telefonica -- which owns O2 -- a whopping £10.25 billion in cash for the network, which only a few months ago was in talks to be acquired by BT.

"Telefónica has entered into an exclusivity agreement with Hutchison Whampoa in relation to Hutchison's potential acquisition of O2 UK," Telefonica said in a press release this morning. "The exclusivity period will last several weeks, allowing Telefónica and Hutchison Whampoa Group to negotiate definitive agreements, while the necessary due diligence process on O2 UK is completed."

'Mobile tariffs tend to rise'

O2 boasts over 23 million customers. Combined with Three's eight million, the two networks would lay claim to a bigger slice of the UK's mobile market than anyone else -- EE would be the next-largest network, with 27 million customers. The deal comes hot on the heels of BT's confirmed intention to buy EE, and as such, has sparked fears of reduced competition and higher prices.

"Any agreement would provoke heavy scrutiny from competition authorities," said Kester Mann, analyst at CCS Insight. "Unlike the proposed acquisition of EE by BT, this deal would reduce the number of mobile operators from four to three. Ofcom has worked hard to maintain the UK as a four-player market and would have significant reservations."

Mann notes that the European Commission would get the final say-so on both the O2 and the EE deals, but told CNET, "Having agreed a similar deal in Germany last year, it may have set a precedent that could see the deal receive the green light, albeit with significant concessions.

"The deal might not necessarily be good news for consumers," Mann continued. "Evidence in other European markets shows that mobile tariffs tend to rise following in-market consolidation. Regulators will be keen to ensure this is not the case in the UK."

Vodafone in trouble

A Three-O2 merger would see the UK's four competing mobile networks becoming three, with Vodafone the only network not allying itself with another major provider. Experts say that being able to offer not just phone service but TV and broadband too is becoming increasingly crucial.

"A lot of people want a bundle," said John Delaney, analyst at IDC, "And if you don't offer one you're effectively not in contention for their business."

Vodafone is one firm that currently only offers mobile service, and is now facing owning only a very small slice of the UK market. Is a Vodafone alliance on the cards?

"Vodafone will be looking very hard at a transaction," Delaney said. "Of course at the moment it wouldn't be a mobile operator because there are none left, so it'll be looking hard at an Internet service provider (ISP).

"The possibilities are TalkTalk, Virgin Media and Sky. TalkTalk would be easiest and cheapest, but also least effective because they've got a weaker pay-TV offering." Virgin is unlikely for several reasons, including that it was recently acquired itself by Liberty Global.

"There are already some partnerships between Vodafone and Sky. Both parties have an interest in a closer combination -- Sky because it has no direct control over a mobile network."

Meanwhile, other experts predict that more deals featuring Three and O2 could be imminent. "Analysts could expect another acquisition from Three and O2 in the future," Imran Choudhary, analyst at Kantar Worldpanel said. "The provider currently has no pay TV or broadband offer where EE offers a full quad play service. Suppliers like TalkTalk and Virgin Media would be a good fit but are also potential targets for Vodafone which is now in greater need of a partnership than anyone else out there."