Hutchison Whampoa hopes to buy O2 UK for $15 billion

The pairing-off of major U.K. telecommunications players continues: On Friday, Three’s Hong Kong owner, Hutchison Whampoa, said it was now in exclusive takeover discussions with Telefónica’s O2.

The merry dance began last November, when fixed-line player BT (the company that once spun out what became O2) said it wanted to get back into the mobile game, and was considering buying either EE (joint-owned by Germany’s Deutsche Telekom and France’s Orange) or O2. Hutch waded in days later, indicating that it was also mulling a purchase of EE or O2.

In December, BT formally announced that it was in exclusive talks to pick up EE for just under $20 billion. So it’s no surprise to see Hutch now doing the same with Three – a move that would reduce the number of network-owning British carriers from four to three.

As things stand, Spain’s Telefónica would get £9.25 billion ($13.86 billion) in cash for O2, which it would no doubt use to pursue further consolidation opportunities in other markets – last year it bought KPN’s German E-Plus subsidiary, for example.

It could also look forward to “deferred upside interest sharing payments of up to a further £1 billion in the aggregate payable after the cumulative cash flow of the combined businesses of Hutchison 3G UK Limited and O2 UK has reached an agreed threshold,” according to the statement.

All this depends on due diligence, agreement on terms and regulatory approval. At the EU level, digital economy commissioner Günther Oettinger says he’s keen to see more consolidation in European telecoms, so as to create bigger regional rivals to U.S. carriers. Though this, of course, would be a larger Hong Kong-owned player.

Telefónica already got rid of its U.K. fixed-line business in 2013, selling it to BSkyB for $300 million.

Iliad’s Xavier Niel buys Orange Switzerland, growing his empire

French telecom tycoon Xavier Niel may have seen his offers for T-Mobile US rebuffed, but it looks like he’s going to get his hands on a mobile carrier after all. Niel’s private holding company NJJ Capital is buying Orange Switzerland for €2.3 billion (U.S. $2.8 billion) and expects to close the deal in the first quarter after getting regulatory approval.

This deal is a bit different from the [company]T-Mobile[/company] bid, since Neil is buying it direct through private equity. Over the summer, French ISP [company]Iliad[/company], which Neil founded and controls, offered to buy Deutsche Telekom’s controlling interest in T-Mobile US, but [company]DT[/company] and T-Mobile turned it down.

Niel has had more luck on Europe where he bought Monaco Telecom from [company]Cable and Wireless Communications[/company] in April. Orange Switzerland, however, is a far bigger prize, and ironically it bears the name of one of Iliad’s biggest competitors in France. Orange Switzerland isn’t part of the [company]Orange[/company] Group anymore. Orange sold its Swiss operations to Apax Partners in 2012 after Apax won a bidding war that included – you guessed it – Xavier Niel. There have also been reports that Iliad is interested in buying French mobile competitor Boygues Telecom, though Niel has downplayed them.

There’s no word yet on what Niel will do with the Swiss mobile carrier if and when the deal closes. In France, Iliad’s Free Mobile has set off a price war, driving down mobile rates across the country. We might see the same thing across France’s alpine border.

BT in talks to buy EE for $20 billion

BT, the company once known as British Telecom, said on Monday that it is now exclusively negotiating a possible £12.5 billion ($19.6 billion) takeover of the mobile carrier EE, a joint venture of Germany’s Deutsche Telekom and France’s Orange.

BT and EE are now in a period of exclusivity that will last for “several weeks”, during which time BT will “complete its due diligence and for negotiations on a definitive agreement to be concluded.”

The former state telco had previously said that it was considering a purchase of either EE or O2, which is owned by Spain’s Telefonica. Since that revelation in late November, Three – the smallest U.K. mobile operator, owned by Hong Kong’s Hutchison Whampoa – was also reported to be contemplating a buy of EE or O2.

“The proposed acquisition would enable BT to accelerate its existing mobility strategy whereby customers will benefit from innovative, seamless services that combine the power of fibre broadband, wi-fi and 4G,” BT’s statement read. “BT would own the UK’s most advanced 4G network, giving it greater control in terms of future investment and product innovation.”#

According to the statement, the £12.5 billion would be a combination of cash and BT shares, which would leave Deutsche Telekom with a 12 percent stake in BT, and Orange with a 4 percent stake.

It will be interesting to see how this plays out with the regulators. BT is not currently a significant mobile player (it runs a virtual network that resells EE connectivity) so the buy would not in itself reduce the number of mobile carriers in the U.K., but if Hutchison went ahead with an O2 buy, that would bring the number of network operators down to three.

The new EU commissioner for the digital economy, Günther Oettinger, is quite keen on encouraging consolidation in the European telecoms sector, so as to create more powerful telcos that can better compete on the international stage.

“We firmly believe that convergence is the future of telecommunications in Europe. Customers want fixed-mobile converged services from a single provider,” Deutsche Telekom CFO and EE chairman Thomas Dannenfeldt said in a statement. “The proposed transaction with BT offers the chance to further develop our superbly positioned mobile business engagement in the UK and to take part in the outstanding opportunities of an integrated business model.”

Europe probes Orange-Jazztel merger over competition concerns

The European Commission has launched an investigation into Orange’s proposed takeover of Spain’s Jazztel. France’s Orange already has a Spanish subsidiary, whose connectivity Jazztel resells as a mobile virtual network operator. Jazztel, founded by Fon boss Martin Varsavsky 16 years ago, is more of a fixed-line player, while Orange has both mobile and fixed networks in Spain. The Commission said in a statement that it is worried about the fact that the merger would result in just three nationwide fixed-line communications providers in Spain (the others are Telefónica and Vodafone) and, by reducing competition, allow the ISPs to increase their prices. Orange has proposed commitments to keep things fair, but the Commission doesn’t think they go far enough.

What do cloud consolidation and disruption have in common?

One thing is for sure, we can expect to see much more of cloud consolidation and disruption happening in the IT space over the coming months and years. Recently, Cisco, EMC, HP and IBM have all acquired startups from the cloud space. And each of these acquisitions was disruptive in their own way.

Cloud, in theory, should not be that disruptive. However, the essence of cloud actually presents a compelling disruptive story that is intoxicating to those whom fully understand the potential. That being said, enterprise IT organizations will leverage a combination of traditional IT services and cloud-based solutions.

Not surprisingly, the recent cloud acquisitions sit closest to the current state of the traditional enterprise. Key to this strategy is to 1) expand the portfolio by offering new solutions and 2) evolve the enterprise (and provider) toward a cloud-based strategy.

Keeping score

For those keeping score, Cisco acquired Metacloud. EMC acquired Cloudscaling. HP acquired Eucalyptus. And IBM acquired SoftLayer. Based on the momentum, one could look toward IBM to make the next move. On the other side, with Cisco, EMC and HP going after private cloud solutions, there is a position to take that it is these three to watch. An additional factor to consider is that a startup may have a great solution, but not enough runway (money) to keep them afloat until the market is ready to adopt. Watch for more of these situations, as the overall IT market takes longer to adopt disruptive solutions such as cloud-based solutions.

Shifting the incumbents

Regardless of who moves first, second, third or fourth, the act of acquiring cloud-based solutions will create a shift in the provider’s overall strategy. For the enterprise CIO, one key to watch will be momentum among the cloud startups. Which solutions are up-and-coming and getting quite a bit of attention by early adopters? Two that come to mind are Docker and OpenStack. If OpenStack were a company, this would be the one to watch. In any case, enterprise IT organizations need to keep close watch of this area.

As enterprise IT organizations shift from traditional IT infrastructure to converged infrastructure and onward to cloud-based solutions, the incumbent provider must have an answer to the shift. Let it be noted that the incumbent need not provide all parts of the solution. This is where the ecosystem comes in to create value and fill the gaps in the strategy.

Leveraging innovation

Many ask why the incumbents do not innovate internally and build out their portfolio like they have in past years. With a vibrant industry of up-and-coming potential solutions, there are easier paths to success. Why take the risk and invest significant funding into a number of different strategies only to have one pay off? Instead, watch the space and acquire the right solution that has a proven technology and fits the model well. The key is finding the point when the solution is proven, but not so successful that it demands paying a premium.

For the CIO, this means keeping close tabs on how the cloud space is evolving regardless of the stage of adoption they are at. Cloud solutions impact organization, services, and processes in addition to technology.

Divesting leads to Consolidation

The big breakups of 2014 are leading to further cloud consolidation. Many of the large IT providers have simply gotten too big and too diversified. Divesting is essentially a healthy way to trim their portfolio and refocus the company in leading areas within their industry. Divesting also opens the door to an interesting side effect of acquisition opportunities.

Intersection of cloud consolidation and disruption

Each of the acquisition targets is disruptive in their own right. The market as a whole is also very fragmented with solutions solving a similar problem, but in very different ways. And each company does one thing and one thing very well. The opportunity to explode the solution comes with building out the ecosystem. For the startup, what better way than to sell to a larger organization that has several of the building blocks already integrated and productized. Plus, the alternative of heading toward IPO is just not as appetizing of an equity event as it used to be.