And then there were three

All change in the UK mobile market as BT pick up EE and 3 acquires O2

Mobile network Three is set to acquire its rival O2 for more than £10bn in a deal which consumer groups fear could increase prices for phone calls and internet access on the go.

Hong Kong tycoon Li Ka-shing is set to become one of the biggest foreign investors in the UK when his Hutchison Whampoa conglomerate acquires the O2 network from its Spanish owner Telefónica. Both parties declined to comment.

The merger will catapult Hutchison from Britain’s smallest network operator to its largest. Three’s 7.5 million customer base will swell to 31.5 million and the number of mobile network owners in the UK will fall from four to three.

As recently as 2010, before Orange and T-Mobile merged to form EE, the UK had five network owners and a fiercely competitive market.

Experts have warned that prices could rise. As the challenger brand, Three’s strategy has been to keep larger rivals on their toes by undercutting their offers, for example with unlimited mobile data packages. But this deal takes Three from underdog to top dog, price comparison site uSwitch said this week, warning: “A lack of competition due to its merger could mean it can get away with cutting back on those tempting packages.”

Three launched on 3 March 2003 offering a patchy 3G mobile internet service from what rivals claimed was just a few dozen masts. Now it will command a 41% market share. Its nearest rival EE will have 32%, while Vodafone will have just 24%.

Sky, which had also been in talks to acquire O2, is now out of the running, with Hutchison entering a period of exclusive negotiations with Telefónica.

The announcement will crown a period of frantic dealmaking for the sprawling business empire which is still tightly controlled by 86-year-old Li, who is reputed to be the richest person in Asia with a net worth of $32bn (£21bn). Li already owns the pharmacy chain Superdrug, Northumbrian Water, Felixstowe and Harwich ports, and earlier this week he acquired Eversholt Rail Group for £1.1bn.

He has been snapping up mobile networks around Europe, recently acquiring Orange in Austria and O2 in Ireland. The deal puts a question mark over the O2 brand in the UK. In Ireland, the network has been rebranded Three, but in that market O2 was the smaller partner.
Telefónica acquired O2 in 2006 for nearly £18bn, in a deal which included networks not only in the UK but Ireland, Germany and the Czech Republic. But the global economic crisis has seen Spain’s former national telecoms network retrench to focus on its home market, Latin America and Germany.

Telefónica turned to Hutchison after losing a reverse auction in which it competed with EE to sell itself to BT. BT has redrawn the telecoms map by jumping back into mobile in December after agreeing to pay £12.5bn for EE. The merger will see BT begin offering bundled packages of broadband, landline, mobile and pay TV, known in the industry as “quadplay”. These bundled services, also on offer from TalkTalk and Virgin Media, may initially offer savings in order to attract subscribers, countering any rise in mobile prices.

Britain is by no means a test case in moving from four networks to three – European regulators have already nodded through mergers which have turned Germany and Ireland into three network markets

Three’s merger with O2 is likely to be scrutinised by Brussels rather than a UK regulator such as telecoms watchdog Ofcom, because the majority of Hutchison’s revenues are outside Britain. Concessions similar to those required in Ireland would include selling affordable airtime to virtual mobile networks like those operated by Tesco Mobile and Virgin Media.