Sky and Talk Talk join Race to acquire O2

Sky and Talk Talk are the latest apparent bidders to join the race acquire O2 from Telefonica.

Talks between the Spanish telecoms firm and Sky and Talk Talk are said to be taking place, according to reports, just days after it was revealed China’s Hutchison Whampoa, the owner mobile network Three, was revealed to be in the running.

Spanish newspaper Cinco Dias said Sky and TalkTalk were both engaged in talks with Telefonica over possible bids for O2.

BT was previously in the running to snap up O2, 10 years after it sold it to Telefonica. In the end the firm decided to make a £12.5bn bid for Deutsche Telecom’s EE instead, making the move from triple play into quad play.

Analysts at Liberum said it would mean “some sort of capital raise” which would also allow Sky “to maintain financial flexibility over the Premier League rights.” It was also noted that quad play services were not proven in the UK.

From a strategic standpoint, we are not sure this would fix its problem in the UK i.e. slowing growth, a more aggressive competitor in BT (with Virgin Media also becoming more aggressive) and that it does not own its fixed-line infrastructure, which its rivals do. And, as we pointed out before, it is a ‘leap in the dark’ given Quad-play is unproven in the UK (Virgin Media offers a Quad-play service via its MVNO [mobile virtual network operator, or partnership with a mobile operator], but it has not been particularly successful).

Elsewhere, Nomura said a buyout would be a surprise move “given management have said there is limited evidence for mobile becoming a household purchase and that if it did, an MVNO would be the preferred response.”

“In addition the company have levered up to over three times for Sky Europe and has promised its shareholders it will focus on deleveraging. Such a move for O2 would require substantial equity issuance.”

Talk Talk recently agreed an MVNO deal with O2 to offer mobile services to its customers, switching from Vodafone. In addition to Talk Talk’s purchase of online streaming service Blinkbox from Tesco, it’s unlikely the firm would stretch as far as buying its entire mobile network.

Analysts at Banco Espirito Santo said:

“We would expect UK players to readjust their market presence in face of the likely acceleration in the take up of convergence and in that sense the potential interest in a standalone mobile operation like O2 UK is not surprising.“

Liberum also suggested the move would push further consolidation in the UK telecoms market with a combination of Vodafone and Liberty Global-owned Virgin Media.

Both Sky and Talk Talk declined to comment on the report.