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O2 (UK/Germany)

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O2 is a leading mobile phone brand now active in only two European markets of the UK and Germany. It was originally formed from the demerger of the European wireless businesses of UK operator BT in 2001. After several years of strong growth as an independent business it became the subject of multiple takeover bids in 2005, and was eventually acquired by Telefonica. It continues to operate as a distinct unit under the O2 name although it is now a full subsidiary of the Spanish group. It became the leading mobile operator in the UK towards the end of the 2000s after securing exclusive rights for several years to Apple's iPhone, before being overtaken by the newly created EE. The brand ventured into several smaller European markets in the 2000s, such as the Czech Republic and Ireland, but these remained comparatively insignificant, and were later sold. In 2013, O2 merged with rival German operator E-Plus to create the country's single biggest operator with around 43m customers. Two years later, a deal was agreed to sell O2 UK to smaller rival Hutchison 3. However, that arrangement faced significant regulatory hurdles, and was eventually blocked, with the result that O2 UK remains a unit of Telefonica.

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Brands & Activities

In its early days O2 did an excellent job establishing itself in the UK as the only true independent in a market dominated by multinational giants. The service established a strong and distinctive brand, as well as a reputation for innovation and quick-thinking. Ultimately however it was a minnow in a pool of sharks. It was only a matter of time before the business was snapped up by a larger competitor. Acquired by Telefonica of Spain, it offered that group a route into valuable Northern European markets.

Despite a rapidly shifting and consolidating market, the O2 mobile service continues to operate as a standalone brand under the umbrella of Telefonica Europe, but its footprint has been shrinking. Its two main markets are now the UK, where it is primarily a wireless operator, and Germany where it offers both wireless and fixed line services. Three other subsidiaries in Ireland, the Czech Republic and Slovakia have been sold.

O2 UK

Until recently, the UK was O2's biggest market. It is still the biggest mobile brand by customers, with almost 25.5m mobile subscribers at the end of 2016, equivalent to roughly 27% share. (EE, which controls the local Orange and T-Mobile services is bigger by total customers, but its three main brands all rank behind O2). The proportion of contract customers is rising steadily, reaching 62% in 2016. The company has deliberately and successfully targeted higher-spending customers, especially in the corporate sector. In 2002 it introduced its own proprietary smartphone, the Xda, and was the first major UK wireless service to support Blackberry PDAs. In late 2003 the group introduced a second innovative device, a stand-alone music player similar to Apple's iPod, which allowed users to download and store music via their mobile. In 2004 it launched its first self-branded handset range under the Xrange banner. O2 Active is a more consumer-oriented 3G data service, launched in 2003 to counter Vodafone Live! The group launched NTT DoCoMo's i-mode mobile internet service in Ireland and the UK towards the end of 2005, offering mobile shopping, banking and other interactive secure services. That service was later replaced by the group's own 3G service, and its proprietary handsets by third-party devices. In 2007, O2 secured exclusive rights to launch Apple's iPhone in the UK. It remained the only reseller of the iPhone until the end of 2009.

Another major coup during 2007 was the deal to acquire naming rights to London's former Millennium Dome, now The O2 Dome. Reversing its previous image as one of the UK capital's most ignominious failures, the O2 Dome reinvented itself during the year as London's premier entertainment venue. In 2009, O2 strengthened its position as one of the country's foremost sponsors of live events by replacing Carling as title sponsor of what is now the O2 Academy group of music venues in eight regional cities as well as London. There are also O2 entertainment venues and stadiums in Berlin, Ireland and Prague. O2 is also the lead sponsor of England Rugby, with a contract that now runs until at least 2021. It was the shirt sponsor for Arsenal football club for 10 years until 2012, and also supports various golf events.

In 2009, the brand launched a financial services operation in the UK, O2 Money, in partnership with NatWest. The service offers two forms of prepaid credit card targeting both adults and younger users. It followed that in 2010 with a move into travel insurance backed by Mondial Assurance. The group markets advance entertainment and sports tickets, as well as other offers, to its customers under the banner of Priority Moments.

Tesco Mobile, a "virtual" mobile service (MVNO) marketed by Tesco and routed via the O2 network, launched at Christmas 2003, and now serves around 4.5m customers. O2 was also for several years the minority partner in The Link, the mobile phone retail chain originally set up as a joint venture between Dixons and BT. In 2006, O2 bought out DSG's 60% shareholding in the business to take full control, rebranding the chain under the O2 brand. As a result the group now has around 450 high street retail stores in the UK. The group also offers a low-cost SIM-only prepaid mobile service aimed at the youth market, under the Giffgaff brand.

In 2006, O2 UK improved its fixed broadband offering with the acquisition of local provider Be. This led to a rapid rollout of broadband services, and the group was named as the best broadband supplier by customer satisfaction for three years in a row between 2007 and 2009. However, in a surprise development, it agreed in Feb 2013 to quit the sector, selling its entire broadband and fixed line telephony business to Sky for around £200m.

Another largely unexpected deal was unveiled in June 2013 with the sale of O2's separate operations in the Republic of Ireland, the local #2 carrier, to Hutchison Whampoa's 3 for €780m. The sale was motivated primarily by Telefonica's need to reduce debt. The combination of O2 and 3 (previously #4 in the market) created a much stronger #2, with almost 38%, narrowly behind leader Vodafone. In early 2015, Hutchison agreed outline terms for the acquisition of O2 UK as well for £10.25bn.

However that deal came under intense scrutiny by regulators, not just in the UK but for the EU. A combination of O2 and 3UK would have almost 41% local market share. The UK watchdog Ofcom called for the deal to be blocked, and regulators also agreed with that suggestion. As a result, O2 UK remains a unit of Telefonica pending an alternative arrangement.

O2 Germany

The UK was overtaken as O2's biggest business in 2014 by Germany. At the end of the previous year, there were only 19.4m mobile subscribers here, making it the smallest of Germany's big four operators. The main O2 banner was supported by several subsidiary brands including SIM-only service Fonic, ad-supported prepaid offering Netzclub and Turk Mobile, a joint venture with Turkey's main telecoms group targeting Germany's large Turkish population. There is also an MVNO in partnership with retail chain Tchibo, which now has around 1.1m subscribers. O2 launched a fixed line service in Germany in 2004 under the name Genion, and has also pushed aggressively into broadband since 2006. It acquired the local operations of the old Hansenet internet service from Telecom Italia in 2010, bringing total broadband coverage to 2.5m subscribers by the end of 2013. Telefonica issued an IPO of O2 Germany's stock at the end of 2012 to reduce debts.

However in July 2013, the group unveiled a transformational deal to acquire #3 operator E-Plus for a total cost in cash and shares of around €8.55bn. The two businesses were merged under the O2 name, with E-Plus owner KPN retaining a stake of just under 21% in the business. Telefonica owns 65%, and the remaining shares are publicly held. Completion was delayed by resistance from one of KPN's shareholders as well as regulatory approval, finally granted in July 2014. Completion took place in Oct that year.

The combined business leapfrogged T-Mobile and Vodafone to become Germany's largest, with 43.22m mobile customers at the end of 2016 - almost 38% share - and 2.3m broadband customers. Most of the various subsidiary brands of E-Plus, such as E-Plus itself, BASE and Simyo were phased out during 2015 in favour of the main O2 banner and E-Plus's secondary service Blau. There is still a high level of pre-paid customers - almost 54% of the total.

The O2 brand launched in the Czech Republic in 2006 with the merger and rebranding of Cesky Telekom and its wireless subsidiary Eurotel, which had been acquired by Telefonica a year earlier. As at Dec 2013 that business served 5.1m mobile subscribers (38% market share) and 1.4m fixed subscribers, with another 1.5m mobile customers (20% share) in Slovakia. In 2013, Telefonica agreed to sell its 69% holding in O2 Czech Republic (including Slovakia) to investment group PPF for €2.5bn.

Financials

O2 UK reported revenues of €6.86bn in 2016, down 12.5% on a reported basis (because of exchange rates) but only 1.5% organic. Mobile contributed revenues of €5.12bn, with most of the rest from fixed line. Operating income was €619m.

Background

O2 Group was created in 2001 from the demerger of the European wireless businesses of BT Group, the UK's main national telecoms operator. At the time these were Cellnet in the UK, Viag Interkom in Germany, Telfort in the Netherlands (later sold) and Digifone in Ireland. All four services were rebranded that year under the O2 name (the name is of course the chemical formula for oxygen).

BT had first dipped its toe into what were then the unknown waters of cellular communications in 1983, forming Cellnet with partner Securicor, best known for security services. The service launched in 1985. At the time, it was a huge gamble, but one that would ultimately pay off handsomely. However the joint venture structure began to hold the business back during the 1990s, when Cellnet was overtaken by more nimble challengers such as Orange. Securicor was bought out in 1999 for £3.15bn. BT had also expanded its footprint by acquiring stakes in a number of other European services, but the costs associated with these rose alarmingly at the beginning of the new century. In 2000 BT agreed to take control of its German joint venture Viag Interkom by buying out partner Eon for a whopping €6.65bn. Only a year later the group was forced to write off almost half of that when values in the sector plummeted. The group also spent a fortune to acquire next generation 3G mobile licenses in the UK and Germany. A year later, BT acquired Norwegian telecoms company Telenor's small stakes in Viag Telekom and Esat Digifone of Ireland for around £2bn. The huge debts incurred by this excessive expansion weighed heavily on BT, and the group was forced to demerge BT Cellnet in 2001.

The new company, initially launched under the name mmO2, set about consolidating its newly independent portfolio of businesses. The Dutch subsidiary was sold in June 2003 for €25m, at an accounting loss of £1.4bn, to private equity group Greenfield Capital. In early 2004 the group, retitled O2 Group, announced it had become a founding partner of Starmap, a pan-European alliance of independent mobile operators, cross-promoting each other's services. Yet its independence was already beginning to look short-lived, as O2's strong growth made it the subject of several bid approaches. It declined a preliminary takeover offer from Dutch telecoms group KPN in 2004, and preliminary talks with NTT DoCoMo also came to nought. In 2005, T-Mobile too was said to be looking closely at the business as a way of bolstering its own presence in the UK. However the winning suitor was eventually Telefonica, whose offer combined a level of semi-autonomy with a handsome bid of £17.7bn, almost three times revenues. The deal was agreed in November 2005.

In 2004, O2 launched a lawsuit against what was then a new rival, Hutchison 3, for copyright infringement. The latter company had run a TV advertising campaign which borrowed the bubbles imagery used in O2's advertising to support a claim that its own prepaid call tarifs were better value. O2 argued the bubbles were an intrinsic part of its own branding, and had been built up through sustained and costly marketing. O2's case was dismissed by a UK court in 2006. An appeal to the European Court of Justice was also thrown out in 2008.

Until recently the group also operated O2 Airwave, a secure national wireless communications network for the UK's police, ambulance and fire services. Telefonica launched a strategic review of that service in 2006 and agreed to sell it to Australian bank Macquarie in 2007 for £2bn. Peter Erskine stepped down as group chief executive of O2 at the end of 2007. He was replaced by Matthew Key, previously CEO of O2 UK

Last full revision 23rd March 2016

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