Telefonica to buy mobile firm O2 for $31.6 bn

LONDON/MADRID: Spain's Telefonica SA has agreed to buy British mobile phone firm O2 Plc for 17.7 billion pounds ($31.6 billion) to enter two of Europe's biggest telecoms markets, the UK and Germany.

Telefonica, the world's fifth-biggest telecoms firm by market value, said on Monday it would pay 200 pence a share in cash, a 22 percent premium to O2's closing price on Friday.

The Spanish firm, whose shares were suspended in Madrid, has been looking to expand in Europe after years of building its presence in Latin America.

A source familiar with the situation said Telefonica would fund the deal using loans provided by Citigroup, Goldman Sachs and Royal Bank of Scotland.

Telefonica said it did not expect to issue shares and pledged to continue its share buy-back programme and current dividend policy.

O2, Europe's sixth-largest mobile phone company, has long been tipped as a takeover target because it is one of Europe's few independent and purely mobile operators.

Deutsche Telekom AG and Dutch group KPN together tried to formulate a plan to buy O2 earlier this year, the companies said at the time, but no deal emerged.

A trader in London said O2 shares were likely to rally above 200p on hopes of a counter-bid.

"KPN, Deutsche Telekom and even Hutchison (Whampoa) have been mentioned. But 200 pence looks fully valued, the last time this was talked about we were looking at 175-180 pence a share," the trader said.

Gareth Jenkins, an analyst at Deutsche Bank, also thought the chances of a counter-bid were high.

"Do I think someone will else will come to the table? Absolutely," he said, adding that Deutsche Telekom could pay more than 200p a share with a cash-and-shares bid.

Telefonica said the deal would immediately boost earnings per share, and that it had structured the financing of the deal to achieve an A- credit rating, or no more than one notch below.

The firm said it would generate an estimated 293 million euros ($356 million) of annual operating cost and capital expenditure synergies by 2008. The one-off cost of achieving the savings would be 39 million euros, Telefonica said.

Goldman Sachs and Citigroup are advising Telefonica on the deal. JP Morgan Cazenove and Merrill Lynch are acting for O2.

Shares in O2, which was spun off from Britain's dominant fixed-line telecoms operator BT Group Plc in November 2001, closed at 164-1/4p on Friday. Telefonica shares closed at 13.62 euros.