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Spanish giant eyes O2

Mobile phone operator O2 is set to fall to Spain's Telefonica after Germany's Deutsche Telekom refused to enter a bidding war. Telefonica made a recommended offer of 200p a share for O2 on Monday, and the shares rose to 209p as speculation mounted th...

Mobile phone operator O2 is set to fall to Spain's Telefonica after Germany's Deutsche Telekom refused to enter a bidding war. Telefonica made a recommended offer of 200p a share for O2 on Monday, and the shares rose to 209p as speculation mounted that Deutsche Telekom would make a counter-bid. But the German giant said on Wednesday that it wouldn't, and O2's shares slipped back to 198p.

Deutsche Telekom may have been put off by the price. "Telefonica has paid far too much," reckons Jim McCafferty, analyst at Seymour Pierce. The 200p-a-share offer values O2 at 24 times forecast earnings. That's well ahead of the valuations given to other mobile companies, which trade on around 15 times earnings.

With Deutsche Telekom out of the frame, analysts now think a rival bidder is unlikely to emerge. "There are two potential wild-card bids," says Mr McCafferty. "Hutchison and NTT DoCoMo might put their hats into the ring." But many analysts believe that other potential buyers would struggle to justify paying a higher price.

And the acquisition reveals much about the state of the sector. When the operators paid billions for third-generation (3G) licences, investors might have hoped that 3G services would be driving revenue growth by 2005. But Telefonica's bid for O2 demonstrates that the operators still see higher customer numbers as the route to growth, and are prepared to pay heavily for it. "Everyone who wants a mobile has got one," points out Mr McCafferty. "If you want more customers, you have to take them off someone else."

Customer numbers are important because average revenues per user are flat in mature markets, as falling voice revenues cancel out rising data revenues. "There's no growth in western European mobile," says Julian Hewett, chief analyst at telecoms consulting firm Ovum.

The remaining growth areas are in developing countries or developing technologies. So Telefonica's acquisition of O2 has surprised many because it already has access to faster-growing markets via its operations in Latin America. Vodafone moved to increase its own exposure to developing markets last week when it paid £820m for a 10 per cent stake in India's Bharti Tele-Ventures.

Some analysts even argue that mobile operators should switch their focus entirely, and concentrate on new technologies. "The stock market still believes that mobile commands a premium, but it's never been more at risk from the internet than it is now," says Cyrus Mewawalla of Westhall Capital. Internet-based telephone services are growing rapidly and could eat into mobile revenues.

Oliver Ralph