Spanish telecoms giant Telefonica yesterday agreed to buy mobile group O 2 for £17.7 billion - sparking hopes of a bidding battle for one of the sector's hottest takeover targets.
Financially-powerful Telefonica is to pay 200 pence per share in cash, a 22 per cent premium to O2's closing share price on Friday, sending the UK-based company's shares surging 24 per cent.
A successful 02 bid, the second-largest telecoms offer in Europe since the end of 2000, would allow Telefonica to break into the fiercely-competitive UK market and re-enter Germany, which it abandoned in 2002 after failing to build a greenfield mobile operation there.
"O2's integration in the Telefonica group will enhance our growth profile, it will allow us to gain economies of scale, it will open the group to two of the largest European markets with a sizeable critical mass and it will balance our exposure across business and regions," said Telefonica chairman Cesar Alierta.
O2 said its brand and UK structure would remain in place, with the impact on the company's 10,000 strong UK workforce - mainly in Slough and Leeds - limited by the lack of overlap between the two companies.
Telefonica was thought to have approached O2 last week and was given access to the company's books over the weekend.
"There was an approach and a series of negotiations and it got done very quickly," a source said.
O2, Europe's sixth-largest mobile phone company which owns assets in Britain, Ireland and Germany, is one of the few independent pure mobile phone operators and has long been tipped as a likely target to help trigger a new telecoms gold rush.
European telecoms behmoths have spent the last three years funnelling their sizeable cashflows into paying down debt.
But even after starting to return cash to shareholders again with dividends and share buy-backs, analysts have said they have plenty of room on their balance sheets for major acquisitions.
O2 has one of the largest shareholder bases among FTSE 100 Index companies, with the majority of its 730,000 investors gaining shares when the former BT Cellnet subsidiary split from parent company BT in 2001.
At one point in 2002 shares were languishing at 37p but the company is now worth the same as its former parent at around £18 billion.
Telefonica, the largest telecoms operator in the Spanish-speaking world, last surprised the market in March with a biggerthanexpected $ 3 . 57 billion (£2 billion) bid for Czech carrier Cesky Telecom.
But when Europe's top former telecoms monopoly Deutsche Telekom teamed up with Dutch peer KPN for an aborted O2 bid in August, and France Telecom clinched 80 per cent of Spain's thirdranked mobile group Amena, analysts said Telefonica risked being squeezed out of the European arena.
Yesterday, investor hopes were high that Deutsche Telekom, which had been hoping to fold its struggling T-Mobile UK cell phone business into O2's stronger-performing British arm, would launch a counter-bid.
"Do I think someone else will come to the table? Absolutely," said Deutsche Bank analyst Gareth Jenkins, adding that Deutsche Telekom could pay more than 200p a share with a cash-and-share bid.
A Frankfurt-based dealer tipped the chances of a Deutsche Telekom counterbid at 50 per cent.
Telefonica, whose shares were suspended in Madrid, said the deal would immediately boost earnings per share.
The firm also said it would generate an estimated 293 million euros (£200.6 million) of annual operating cost and capital expenditure synergies by 2008. The one-off cost of achieving the savings would be 39 million euros (£26.7 million).