Li Ka-shing’s Hutchison Whampoa has entered into exclusive talks to buy the British mobile business of Telefónica for £10.25bn, a move that would create the UK’s largest mobile group.

Hutchison confirmed on Friday that the two companies have entered “several weeks” of negotiations over the potential acquisition, although Frank Sixt, Hutchison’s finance director, said there was “still work to do” to reach a definitive agreement.

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The proposed deal would involve Hutchison paying £9.25bn in cash and a further £1bn in deferred payments. Assuming regulatory approval, the tie-up would be completed around mid-2016, said Mr Sixt.

The purchase of O2 would be the largest overseas acquisition yet by Mr Li, according to Dealogic, outstripping the £5.8bn paid by his Cheung Kong group for the UK power networks business of EDF in 2010.

The deal would also mark the latest UK acquisition for Mr Li, following his purchase of the Eversholt Rail Group for £1.1bn earlier this week.

Telefónica has been in talks to sell O2 to Hong Kong-based Hutchison Whampoa since similar discussions with BT ended before Christmas.

The merger would transform the British mobile market. Ofcom, the industry regulator, has long sought to maintain at least four competitors to keep prices low for consumers. Hutchison’s Three network, in particular, has been crucial in setting the lower end of pricing with cheap tariffs giving large bundles of data and calls.

Telefónica and Hutchison are keen to present their deal to the competition authorities alongside the £12.5bn acquisition of EE by BT, one person familiar with the matter said. This would help strengthen their argument that BT is already changing the boundaries of how telecoms should be judged alongside TV and broadband services.

The Spanish telecoms group is worried about being left with a declining mobile business in a market where rivals are adding other business lines such as fixed telecom, TV and broadband to their offers.

Telefónica also wants the cash to help reduce its high net debt levels and fund dealmaking in more core countries such as Brazil.

Merger raises concerns over price rises

Analysts warn of reduced competition

The proposed merger of two of the UK’s four mobile operators by Telefónica and Hutchison Whampoa raises the risk of higher prices in future for the British phone user, sector experts warn. British consumers who have long benefited from some of the lowest prices for mobile tariffs in Europe.

Hutchison, meanwhile, has recently freed additional money to strike deals in Europe following a corporate reorganisation. Berenberg has estimated that Hutchison’s restructuring could boost spending capacity to €9bn-€10bn.

Mr Sixt said the company was also open to taking on minority partners in the deal — most likely in the form of institutional or private equity investors.

The combination of O2 and Three would create the largest mobile operator in the UK with more than 31m subscribers — or about 41 per cent of the market, followed by EE with 32 per cent and Vodafone with 24 per cent.

However, the regulator is likely to push for the combined network to give up some of its spectrum, which is used to broadcast mobile signals. This would entail at least offering low-cost access to its networks for other competitors that use them such as TalkTalk, Tesco Mobile or Virgin Media.

Despite Ofcom’s potential reservations, the decision would likely be taken in Brussels given the international ownership of the two groups.

Li Ka-shing’s $50bn of investments in the UK

Asia's richest man Li Ka-shing waves during a press conference for Cheung Kong Holdings first-half earning results in Hong Kong on August 2 2012

Li Ka-shing’s companies now provide Britons will all manner of goods and services, from perfume and smartphones to electricity and sewage treatment. The deal now being finalised between Hutchison Whampoa and O2 — worth £10.25bn — would mark his biggest investment in the UK so far. If completed, it will take spending by his various companies on UK acquisitions to around $50bn since 1995

Mr Sixt believes there is a “good probability” of attaining European regulatory approval, citing Germany, Austria and Ireland as examples of mobile markets that have been allowed to shrink from four players to three.

The British mobile user may be in for a shock, however, given clear evidence that fewer mobile companies would mean an almost immediate increase in prices. This would be a boost for all companies in the sector, including rivals such as Vodafone. Hutchison believes it can achieve £3bn-£4bn in synergies by merging operations.

A sale at £10bn would reflect a multiple of 7-8 times earnings estimated for 2015, according to analysts, in line with the multiple BT is paying for EE. Telefonica was advised by UBS. Moelis and HSBC advised Hutchinson Whimpoa.

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