Li Ka-shing’s 02 power play must clear hurdle of regulatory approval

If Li Ka-shing pulls off his £10-billion-plus bid for Britain's largest mobile phone operator, O2, it will be the legendary Hong Kong investor's biggest-ever overseas acquisition.

At 86, Asia's most renowned deal-maker is not slowing down. Just a week before his interest in O2 was revealed, Li's Hutchison Whampoa conglomerate added to its portfolio of UK holdings with the £2.5 billion takeover of Eversholt Rail, a business once part of British Rail and which owns almost one-third of the nation's passenger trains.

The Eversholt deal underlines Li's status as one of the biggest foreign investors in the UK. As well as his Three mobile network, Li's empire here includes Northumbrian Water, UK Power Networks, Felixstowe container port and the Superdrug pharmacy chain. In Ireland, Hutchison Whampoa already owns the O2 business, which it bought from Telefonica almost two years ago for €850 million.

While Hutchison Whampoa has confirmed it is in exclusive talks to buy O2 from Spain’s heavily indebted Telefonica, the negotiations are expected to take several weeks.

Money will not be a problem for billionaire Li – one of the richest men in the world, he is estimated to be worth more than $30 billion and was only recently toppled from his spot at the top of Asia's rich list by Alibaba's Jack Ma.

Upheaval in sector

But there will be regulatory hurdles for the takeover at a time of huge change in the telecoms industry. Three is the smallest of the UK’s mobile networks, with a market share of 12 per cent, but a combination with O2 would catapult it into pole position, with 31.5 million customers and market share of 40 per cent.

The combination of the two operators will also cut the number of mobile network owners in the UK from four to three, raising the prospect of reduced competition.

Consumer groups have expressed concerns bills could rise and the regulators, both in the UK and EU, will certainly take a close look at the tie-up.

As Richard Lloyd, head of consumer group Which? said, "Fewer players in an essential market like telecoms is rarely a good thing for consumers." He pointed out both Three and O2 already " have work to do" to improve customer ratings.

Hutchison is no stranger to the European telecoms – in 1994, it launched the Orange mobile network in the UK, but sold it at the height of the dotcom boom five years later.

Its ambitious move in the UK mobile market comes at a time of huge change for the industry, with the rapid rise in the use of smartphones for downloading data and the growing trend towards “bundling” deals for consumers, with “quad-play” offers combining pay-TV, broadband, fixed-line phones and mobile packages.

Meanwhile BT, which also considered a bid for O2, is in negotiations with the EE network, jointly owned by Deutsche Telekom and Hutchison's former business, Orange. EE, which had been planning to float on the stock market, is the UK market leader and the BT deal could be worth £12.5 billion. BT has said it sees "significant synergies" arising from the deal.

Terms of deal

Under the proposed terms of the BT offer, Deutsche Telekom would take a 12 per cent stake in BT and be entitled to board representation, while France’s Orange would take a 4 per cent stake.

For BT, it is a return to the mobile industry, which it exited in 2002 when it spun off its BT Cellnet business (now O2). Telefonica bought O2 in 2005 for just under £18 billion.

The BT/EE deal had been thought less likely to worry regulators as, unlike the prospective Hutchison takeover of O2, it will not reduce the number of networks in the UK. But consumer groups are worried, and rival operators such as Vodafone, as well as Virgin and Sky, will be concerned about the growing concentration of ownership.

Just five years ago, the UK had five mobile operators – Vodafone, O2, Orange, T-Mobile and Three. With so much change in prospect, regulators may decide to take the opportunity to launch a full-scale investigation into the entire UK communications market.

Fiona Walsh is business editor of theguardian.com