O2: KPN next

The mobile telephony sector is moving again. Vodafone sells its Swedish division to Telenor. But the big news was that the Spanish incumbent Telefonica intends to acquire O2. It is like a dance.

O2 is the former mobile branch of BT. In difficult times it was split off from the fixed line business and brought to the stock exchange as an independent company. O2 has a footprint in the UK and Ireland and is active in Germany.

It has been much sought after. As it is one of the smaller companies in Germany, the Dutch incumbent KPN has been interested in buying the German part, as it is in third position with E-Plus in Germany. A month ago there were rumours that T-Mobile and KPN would make an offer. T-Mobile would sell the German part to KPN in order to avoid monopoly claims. But these rumours were denied. Now Telefonica is after O2.

Funny thing is that Telefonica has withdrawn from Germany years ago. Buying O2 would bring the company back in Germany, but still would leave it in the fourth place for mobile telephony. You can not imagine that a company like Telefonica is looking for such a position. The UK and Ireland parts would mean a substantial market share and market extension for Telefonica, but O2 Germany will be small beer for the Spanish multinational. So what would Telefonica do, if it acquires O2. There are two choices: either buy KPN (and combine the German division of O2 with E-Plus) or sell O2 Germany to KPN.

KPN and Telefonica know each other well. Five years ago KPN negotiated a merger with Telefonica. The attempt failed as KPN wanted to get more out of the deal than it was worth. Now KPN will be brought into the position to either buy the German part of O2 and after that being eaten by T-Mobile or France Telecom or being eaten by Telefonica. This last option looks like a real scenario. KPN is a fixed line, mobile and triple play business and fits well in the activities of Telefonica. The former option is less likely as it would give a change to T-Mobile or France Telecom to close off entry of the small Dutch market.

My guess will be that KPN is the next one on the block for Telefonica, if they find money in time after this gigantic acquisition. Give Telefonica a year to recuperate, before its starts eating KPN.