THE SKEPTIC: O2's Tax Credit Gem
FRANKFURT -(Dow Jones)- Reading the fine print is essential for those interested in acquiring O2.
The U.K. mobile phone company's most recent annual report reveals a hidden gem for some future buyer: GBP5.2 billion in unrecognized deferred U.K. and German tax credits which were accumulated when the company racked up huge losses from the write-offs of 3G licenses.
Those credits now make O2 a logical prey for buyers actually conducting business in these countries where the credits can offset other tax liabilities. This gives trade buyers a natural egde over pure financial buyers such as private equity firms.
No wonder speculation is rife that Deutsche Telekom and Dutch KPN are pursuing O2. According to weekend reports, Deutsche Telekom was cooking up a bid for O2 with KPN as its sidekick but the two have abandoned talks because they couldn't agree on a structure for a joint bid. This follows KPN's own failed offer for O2 back in 2003.
Of course, any deal must make sense commercially in the first place. For Deutsche Telekom, O2 would beef up its T-Mobile business in the U.K. where it is suffering from weak profit margins, while KPN's ownership of O2 could finally give it the scale needed to make money in Germany.
Recent M&A action in European mobile phone assets highlight the importance of tax benefits, especially for trade buyers. A Spanish consortium recently sold Amena to France Telecom in a deal valuing the Spanish operator at EUR10.6 billion. That may have looked pricey but deduct the EUR1.7 billion in tax credits and just over EUR1 billion in synergies and the net price wasn't that far off industry multiples.
Meanwhile, Deutsche Telekom itself said Wednesday it will take over Austria's Tele.ring for EUR1.3 billion, including historic losses with a net present value of EUR150 million. And KPN announced in June that it will acquire domestic rival Telfort for EUR980 million, including historic losses with an EUR180 million net present value.
At the time, private equity firms, including KKR, Carlyle, Permira and Apax were also contenders for the assets but lost out.
All that suggests O2's tax-benefit package will continue to attract trade buyers. With France Telecom digesting its Amena acquistion, O2 shareholders will have to await either Deutsche Telekom and KPN sorting out their their differences or hope for a surprise move by Hutchison Whampoa or even Vodafone.
(Joon Knapen has been a financial news reporter with Dow Jones Newswires since 2001, covering the telecom, media and technology sector in Frankfurt and Amsterdam. He can be reached at +496929725509 or by e-mail at joon.knapen@dowjones.com)
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Posted to the site on 15th August 2005