Tesco seeks deal to buy O2 out of joint venture for mobile push

The supermarket, which has had a 50:50 joint venture with O2 since 2003, is aiming to buy the portion of Tesco Mobile it does not already own and secure a long-term deal with Hutchison for capacity on the merged 3 and O2 networks, reports The Telegraph.

Tesco signalled its intentions at a closed Brussels competition hearing about the £10.25bn takeover of O2 this week, according to people present. The expansion plan represents a big shift by Tesco chief executive Dave Lewis, who last year explored a sale of Tesco Mobile as he sought to repair the company’s battered balance sheet.

It is understood that Hutchison is likely to welcome a sale of O2’s stake in Tesco Mobile, as the Hong Kong conglomerate believes it would help convince competition watchdogs to approve its own takeover.

The European Commission’s modelling has predicted that consumer prices could increase 6pc as a result of the combination of 3 and O2, according to sources. The figure would fall to 1pc if Tesco mobile was independent, it is claimed.

For Tesco, independence from O2 and a long-term deal for access to around 10th of capacity on what would be the UK’s biggest mobile network would give it confidence to invest in a renewed attack on the value end of the telecoms market, sources said.

Tesco Mobile, which does not own network infrastructure and instead rents capacity on the O2 network as a so-called “mobile virtual network operator”, has about 4.5m customers. Buying out O2’s share could cost the supermarket up to £300m, City sources estimated.

A Tesco spokesman said: “Tesco is an interested party in the merger review process.

“It is important that any landscape created by the merger process allows challenger brands, such as Tesco Mobile, to deliver the best possible services for UK customers, and champions consumer choice.”

Tesco was just one of an array of players in the mobile market that lined up to call for intervention in Hutchison’s deal, however. The supermarket was joined by executives and legal teams from BT, Vodafone, Sky, Virgin Media, Dixons Carphone, TalkTalk, UK Broadband and the French operator Iliad at the hearing on Monday.

“It was like the competition remedies bazaar,” said one observer.

For instance, UK Broadband, which operates the London-only wireless broadband network Relish via its own chunk of radio spectrum, is understood to have proposed that it could do a deal with Hutchison to create a new national mobile network. It would aim to build its own coverage in densely populated cities and rely on capacity rented from the combined 3 and O2 networks elsewhere.

Sky is already planning to enter the mobile market later this year with a wholesale deal it has already done with O2. It is supporting the Hutchison takeover in the hope of benefiting from a long-term capacity deal and greater investment in network infrastructure.

Hutchison has said it is willing to allocate up to 30 per cent of the capacity of the combined 3-O2 network to long-term deals with retail rivals. The company is fiercely resisting any remedies that would force it to sell off radio spectrum or network infrastructure to a new entrant, however. Ofcom has argued four mobile infrastructure owners are needed to protect consumers from price rises.

Hutchison has countered that after sinking £12bn into the UK market in 2003, it will be unable to compete with the strength of BT and Vodafone if it is not allowed to bulk up by merging 3 with O2. It has promised not to raise prices for five years after the takeover and to invest £5bn in upgrades.

The company is due to have a follow-up meeting with competition officials on Thursday to discuss what deals will be offered to the market. The Commission could then begin exploring the appetite for its proposals as early as next week, sources said.

Hutchison said the competition hearing had been “fruitful”.