20 May 2016

European Commission blocks takeover of O2

In March 2015, Hong Kong conglomerate Hutchison Whampoa agreed to acquire UK-based telecommunication company Telefonica Europe (O2) for around GBP 10 billion. Li Ka-shing, chairman of Hutchison Whampoa, intended to merge the target with its UK subsidiary Three, another telecommunications provider, following the transaction.

With a net worth of USD 27 billion, Li has been ranked by Forbes as the second richest person in Asia this year. His flagship group Hutchison Whampoa is engaged in a range of businesses in various industries, including the container port, property and retail sectors, which are largely based in China and Hong Kong.

However, his recent manoeuvres, including the O2 deal, have been perceived by some as an attempt to redeploy assets out of the local market and into Europe, as Hong Kong’s political uncertainty persists. In 2014, tens of thousands of protestors staged a large-scale demonstration (termed the “Umbrella Revolution”) in the city state outside government headquarters, as well as other prime locations. Recent clampdowns on dissidents, including the alleged abductions of Hong Kong booksellers who sold materials critical of the Communist Party, may possibly fuel discontent among citizens, too. Another reason for Li’s divestments is his concern over China’s unpredictable regulatory and legal environment, the Wall Street Journal reported. In addition, Li also cashed out on several properties in China worth billions of US dollars in 2013 and 2014.

Last year, Hutchison Whampoa underwent a major reorganisation worth a combined HKD 832 billion (USD 107 billion), according to Zephyr, the M&A database published by Bureau van Dijk, to simplify its corporate structure. As a result, the group’s local businesses are currently held under two Cayman Islands-registered entities, namely Cheung Kong Property and CK Hutchison.  However, Li denied attempting to flee the local market via the deal and pointed out that many other Chinese companies are also registered abroad for tax efficiency purposes, as reported by the Economist. In a press conference, he explained that the new structure was meant to allow his successors to operate more easily.

Unfortunately for Li, on 11th May Hutchison Whampoa’s bid to acquire O2 was halted by the European Commission. Commenting on the verdict, the competition commissioner Margrethe Vestager said she was concerned about the merger leading to fewer telecommunication providers in the UK, which could have led to higher prices for consumers.

Hoping to appease antitrust regulators, Hutchison Whampoa had previously inked deals with rivals, such as Virgin Media and Sky, offering them a part of its combined network capacity. The acquiror had also agreed to freeze prices for five years and invest GBP 5 billion in the industry if the deal was approved. These efforts, though, still failed to convince Vestager, who said the remedies were insufficient. Disappointed, Hutchison Whampoa stated it may consider legal action to challenge the ruling.

One may wonder if Hutchison Whampoa’s ongoing acquisition of Italy-based Wind Telecomunicazioni (valued at EUR 22 billion) will suffer the same fate as the O2 takeover. If Li’s recent foray is really part of his plan to redeploy assets to Europe, buying Wind might have become ever more crucial after having lost out on O2. It may also turn out to be a face-saving deal for Hutchison Whampoa following a humiliating defeat.

© Zephyr