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Telefónica, Spain's biggest telecoms group, on Monday emerged from a pack of potential bidders for O2 with an agreed £17.7bn ($31.4bn) offer for the second largest UK mobile operator.
The all-cash deal is priced at £2 a share, a 22 per cent premium over Friday's closing price. It follows recent interest in O2 from KPN of the Netherlands and Deutsche Telekom of Germany.
If completed, the deal will make Telefónica the world's second largest listed international telecoms group by market capitalisation, behind the UK's Vodafone. Analysts said on Monday that it might spark further consolidation in Europe.
The move was partly motivated by the failure of an ambitious €5bn share buyback programme to lift Telefónica's share price this year. On Monday the shares fell more than 2 per cent to €13.3, off a 12-month high of €14.5. O2 rose 25.3 per cent to 205¾p, up 41½p giving it a market capitalisation of £18.03bn, above the Telefónica bid.
France Télécom's aggressive Orange brand is expected to intensify competition in Spain, where Telefónica has seen its market share halved since liberalisation. The Spanish operator has been eyeing O2 for at least a year, although it has never admitted to formal takeover talks. There were also high-level approaches to KPN. O2 will add 24.6m clients in the UK and Germany to Telefónica's 90m-strong subscriber base, which is mainly in Latin America and Spain.
If the Telefónica bid is successful, Peter Erskine, O2's chief executive, could earn up to £7.5m, assuming the company's remuneration committee allows him to exercise all his options. David Finch, chief financial officer, could receive up to £4m.
These payments would come on top of multi-million pound pay-outs for the two men in July, after they exercised options under a three-year plan. Mr Erskine received £3.4m and Mr Finch £2.3m, before tax.
The acquisition is expected to be completed in January. It will be financed via a bridging loan arranged by Goldman Sachs and Citigroup. Telefónica bonds weakened and, in the credit derivatives market, the cost of buying protection against the company defaulting rose about 13 per cent, or 6 basis points, to 50bp. O2 widened 2bp to 47bp. Standard & Poor's on Monday cut Telefónica's rating one notch to A- and warned it would cut it a further notch to BBB+ if the deal went through.
Additional reporting by Ivar Simensen in London
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