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Spain's Telefonica makes US$31bn offer for UK's O2

Telefonica SA, Spain's biggest telephone company, agreed to buy UK mobile-phone operator O2 Plc for £17.7 billion (US$31.5 billion) in the largest acquisition in the European phone industry in five years.

Telefonica offered 200 pence in cash per O2 share, the Madrid-based firm said in a Regulatory News Service statement.

The offer for Slough, England-based O2 is 22 percent higher than the Oct. 28 closing price of 164.25 pence.

Buying O2 will give Telefonica 25 million customers in the UK, Germany and Ireland, bringing the total count to more than 165 million. The deal would be the largest led by chairman Cesar Alierta, 60, who is seeking assets in Europe after spending more than US$50 billion on takeovers in Latin America since the 1990s.

"Telefonica can't push much further into Latin America," said Gary Dugan, head of equity research at Barclays Investment Services. "You have to get bigger globally and not just protect your backyard."

The stock of O2 rose as much as 26 percent to 206.75 pence, above the offer price, and traded at 204 pence as of 8:38am in London yesterday.

The shares of Telefonica and its mobile-phone unit Telefonica Moviles SA were suspended from trading in Madrid, the exchange said. The purchase will "immediately" add to earnings per share, according to the statement.

The deal would be the biggest takeover announced in the industry worldwide since the US$41 billion acquisition of Nextel Communications Inc proposed in December last year. It's the largest involving a European Telecommunications company since May 2000, when France Telecom SA agreed to buy Orange Plc from Vodafone Group Plc for US$41.7 billion, according to Bloomberg data.

The board of O2 said it considers the bid "fair and reasonable" and will recommend its shareholders accept it.

O2 "will open the group to the two largest European markets with sizeable critical mass and it will balance our exposure across business and regions," Alierta said in the statement.

The UK company is the biggest mobile-phone operator in Britain by customers. Its second biggest market is Germany and it also offers services in Ireland.

Before yesterday, O2 shares have jumped 56 percent in the last 12 months as the company has been the focus of takeover speculation ever since it rejected a bid from Royal KPN NV of the Netherlands in February last year.

In August, German firms Deutsche Telekom AG and KPN ended talks to make a joint bid for O2. Under the plan, KPN would have taken control of O2's German business.

"It's the European operator that better fits Telefonica's strategy," said Alberto Espelosin, who helps manage US$7 billion, including Telefonica shares, at Ibercaja Gestion in Zaragoza, Spain. "The key will be whether Deutsche Telekom wants to make a higher offer."

Alierta said last month that Telefonica "would make selective acquisitions" to add growth. In June, the former Spanish phone monopoly acquired a controlling stake in Cesky Telecom AS, the biggest Czech phone firm, for 2.7 billion euros (US$3.3 billion). Last month, it spent an additional 917 million euros to boost its stake in Cesky Telecom to 69 percent.
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