Potential New Bidder for Telefonica UK Limited (“O2”)

Following on from the previous monthly news regarding the proposed Hutchison Whampoa acquisition of O2 it has emerged that Sky could be pivotal in a separate bid for O2.
The European competition regulator blocked the Hutchison deal but as has been reported in the Business section of the Telegraph, Sky has emerged as the potential kingmaker in a looming £9bn battle between private equity giants for the mobile operator O2.

The pay-TV company is being courted by at least 5 buyout specialists seeking its heavyweight backing for their bids. Discussions are in their early stages but involve a who’s who of big private equity firms, including KKR, TPG, Bain Capital, Apollo, CVC Capital Partners and Apax Partners.

Sky’s role in a bid could prove crucial as it plans to launch its own mobile service based on the O2 network later this year. If it backed a buyout, Sky would not seek a stake in the operator, but could put £2bn into a strategic partnership that would give it better wholesale terms while helping O2 improve its networks.

Such an arrangement would be a boost in a competitive sale of Britain’s number two mobile network. It would provide greater certainty over O2’s earning power and allow private equity firms to bid more, City sources said, making a buyout a more credible challenger to a stockmarket float.

It is understood that discussions between Sky and potential private equity partners are focused on the company paying for a set portion of capacity on the O2 network over a decade or more.

There have been suggestions that Sky’s “backhaul” network infrastructure could be used to carry O2’s mobile data at a lower cost. As demand for mobile internet access rockets, some of O2’s potential new owners want to increase coverage and capacity cheaply by linking tiny masts known as femtocells to Sky’s broadband network.

O2’s management is also believed to be examining its portfolio of mobile masts to see whether it could be sold off for cash, amid strong demand for such infrastructure assets across Europe. However, one buyer of masts said it did not expect a sale because of O2’s network sharing partnership with Vodafone which proved fatal to Hutchison’s merger plans.

As well as seeking Sky’s support, private equity firms are understood to be sizing each other up to form a bid consortia to tackle what would be the UK’s second biggest buyout, behind the £12bn sale of Alliance Boots in 2007.

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