Li Ka-shing buys way to European telco credibility

HONG KONG: Li Ka-shing may soon be able to set a new tone for his problematic telecom investments. The Asian magnate's talks over buying the 02 UK mobile unit of Spain's Telefonica for 10.3 billion pounds ($15.4 billion) could see him effectively doubling down on a business that struggled for years, but if the deal comes off it should provide Li with enough scale to move forwards.

Hutchison Whampoa's European 3G adventures started in earnest after it sold its stake in mobile operator Orange to Germany's Mannesmann for around $15 billion in 1999. The proceeds were quickly ploughed back into 3G where Hutchison overpaid for licenses, along with many of its peers. Since then, Li has spent over 30 billion euros ($33.7 billion) on European 3G. But it was only in 2010 that Hutchison finally made its first full year of operating profit from its 3 Group Europe.

Now Hutchison is finally shrugging off its challenger status. A deal with 02 would turn Hutchison into the top wireless carrier in the United Kingdom, consolidating its largest market to three players. The price is a lower multiple of the target's EBITDA than UK fixed-line operator BT agreed to pay in December to acquire the bigger EE. Through smaller deals, Hutchison has already led consolidation in Austria and Ireland, where it is now the second largest operator.

Buying up competitors in telecoms can make sense. There is a strong association between higher margins and fewer telecoms providers in a single market. A growing acknowledgement of this reality by antitrust regulators, along with a push by BT into mobile, has created new opportunities to consolidate.

The next big prize for Hutchison would be sealing a deal in Italy, its second biggest market, where it remains the underdog. The most likely target is Vimpelcom's Wind, a tie-up with which could create a new market leader. The challenge there is convincing Russian billionaire Mikhail Fridman, who effectively controls Vimpelcom. A joint venture may be easier to agree than an all-out takeover. But if Hutchison is serious about buying its way to telecom credibility, Li may be willing to make that sacrifice.