Telefonica to Acquire Cellphone Firm O2

Telefonica, the Spanish telecommunications powerhouse that has been expanding in Latin America and Eastern Europe, has agreed to buy British mobile phone company O2 in a $31.4-billion deal that will help it expand in Britain and Germany.

Telefonica Chairman Cesar Alierta said Monday that the deal would boost the firm’s capacity for growth and balance its exposure regionally, giving it more assets in Europe after an expansion in Latin America.

“It accelerates Telefonica’s already beneficial growth prospects, widening the gap with our peers,” he said. “We are entering in the two largest markets in Europe with critical mass.”

The combined firm would have 116 million mobile phone users and a 16% market share in terms of revenue in Europe’s top five mobile phone markets.

It would have 170 million customers globally including fixed-line users. Vodafone Group has more than 165 million mobile customers; France Telecom, 70 million mobile customers; and Deutsche Telekom, which had previously shown interest in O2, has more than 80 million mobile customers.

The Spanish company agreed to pay 200 pence ($3.55) in cash for each O2 share, a 22% premium over the stock’s closing price Friday. The O2 board recommended that shareholders accept the offer.

Shares of O2 surged 25%, while Telefonica shares fell 2.3%.

Peter Erskine, chief executive of O2, said the geographic operating differences between the two companies was a strong reason for recommending the deal.

“They have no overlapping territory, so they will be able to offer our customers better roaming and better services around the world,” Erskine said.

Investec Securities said it was possible that former suitor Deutsche Telekom could make a counter bid. Investec said the synergies available to Deutsche Telekom within Britain were significantly higher than those available to Telefonica and subsequently, the chances it would bid were high. Deutsche Telekom has not commented.

The deal follows Telefonica’s $3.32-billion acquisition of a majority stake in Czech operator Cesky Telekom this year. Last year it acquired BellSouth Corp.’s Latin American assets for $5.9 billion.

O2 was created in 1971 from the mobile telephone operation of BT, Britain’s largest telecommunications company. The company and its subsidiaries now provide service to nearly 25 million customers in Britain, Ireland and Germany.

Telefonica had about 145 million customers in June and 173,000 employees.