Billionaire Li Ka-shing’s Hutchison Whampoa Ltd. (13) (13) agreed to buy Telefonica SA (TEF) (TEF)’s Irish unit for as much as 850 million euros ($1.1 billion), a year after failing to take over Ireland’s former phone monopoly Eircom Group.
Hutchison’s Three Ireland, the country’s third-largest wireless carrier, will pay 780 million euros in cash and an additional 70 million euros upon meeting certain performance targets, the companies said today. The combination with Telefonica’s O2, Ireland’s No. 2 mobile operator, will increase Hutchison’s customers to about 2 million and its wireless market share to 37.5 percent, the Hong Kong-based company said.
Three Ireland’s 2 billion-euro bid for Eircom was rejected last year by the examiner overseeing a court-supervised debt restructuring of the phone company, the country’s largest. Hutchison, the biggest Asian investor in European wireless assets, completed the takeover of Orange in Austria this year, and is evaluating a merger of its Italian unit with Telecom Italia SpA (TIT) (TIT).
The deal, announced three days after Bloomberg reported that the companies were in advanced talks, will give Three Ireland “the financial strength to be more aggressively competitive in the Irish marketplace,” Chief Executive Officer Robert Finnegan said in an interview.
European telecommunications companies are seeking to consolidate as growth in mobile-data usage slows and increasing regulation damps profit increases. Three Ireland will consider whether its network-sharing agreement with Vodafone Group Plc (VOD) (VOD) or 02’s network partnership with Eircom is best for the combined Three-02 Ireland business, Finnegan said.
The deal values Telefonica’s Irish unit at 7.1 times earnings before interest, tax, depreciation and amortization estimated by analysts for this year. In 57 worldwide acquisitions of wireless phone carriers over the past decade, the median Ebitda multiple was 8.42, according to data compiled by Bloomberg.
The transaction has the potential to bring Telefonica, Europe’s most-indebted carrier, closer to a goal of cutting net debt to less than 47 billion euros this year.
Telefonica dropped as much as 2 percent to 9.60 euros and was trading down 1.5 percent at 12:53 p.m. in Madrid. Hutchison fell 1.3 percent to HK$77.05 at the close in Hong Kong.
Vodafone remained Ireland’s biggest wireless carrier, with a 45.3 percent share of the country’s mobile revenue in the first quarter, according to Dublin-based regulator ComReg. The combined O2 and Three entity had 43.6 percent, the figures showed. The merged carriers had combined 2012 revenue of 803 million euros, Three Ireland said.
Other potential bidders, including Eircom and Liberty Global Inc.’s UPC Ireland, had also received information on the sale, a person familiar with the matter said June 10.
“This is a very good transaction for Telefonica,” said Andres Bolumburu, a Madrid-based analyst at Banco de Sabadell SA. (SAB) “This represents a very significant step to meet its debt reduction target.”
After an $85 billion acquisition spree over a decade increased debt and triggered credit-rating cuts, Telefonica Chief Executive Officer Cesar Alierta began selling assets last year. The company is studying ways to raise money from its Colombian unit after shelving plans to carry out an IPO for the company’s Latin American division.
Hutchison’s earnings before interest and taxes at its European mobile phone unit, which also operates in the U.K., Sweden and Denmark, doubled to HK$3.1 billion ($400 million) last year on data and smartphone sales. The division posted its first annual profit in 2010, seven years after starting services.
Hutchison was advised by BNP Paribas SA (BNP) and JPMorgan Chase & Co (JPM)., while Bank of America Corp. and Barclays Plc (BARC) advised Telefonica.