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UPDATE: Telefonica O2 Chief Executive Steps Down

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LONDON (Dow Jones) Telefonica's mobile phone arm, O2 Europe, Thursday announced the departure of its long term Chairman and Chief Executive Peter Erskine, replacing him with Matthew Key, currently Chief Executive of O2 UK.

Peter Erskine - who spearheaded the creation of O2 PLC in 2001, its European expansion and subsequent sale to Telefonica in 2005 for GBP17.7 billion - will keep his position on the board of Telefonica, the world's fourth largest telecommunications operator by market value. He is believed to have made GBP12 million from the sale of O2 to Telefonica.

Key, who runs the U.K.'s largest mobile phone operator by subscribers, will take over from Peter Erskine on Jan 31., 2008. Erskine, aged 57, will also join Telefonica's Comision Delegada, the executive commission of the board.

Erskine spent 6 years as Chief Executive of O2, since it demerged from U.K. telecommunications operator BT Group and expanded its operations beyond Britain, into Germany, the Republic of Ireland, Czech Republic and Slovakia. Erskine was also head of BT Wireless, O2's previous incarnation, having joined BT in 1993 as head of BT Mobile.

Having grown the company, Erskine has decided to turn his attention to helping the Telefonica board, as well as potential non-executive director roles within industry, a spokesman said on behalf of Peter Erskine.

"Peter has been at O2 for six years, overseeing the integration of the two businesses. He now thinks it's the right time to hand over the reins to new talent from within," said O2 Director of Communications, David Nicholas.

A number of industry commentators say Matthew Key - who heads Telefonica O2 Europe's largest business unit, and Telefonica SA's second largest wholly-owned unit - has been lined up as Erskine's successor after spending three years transforming O2's U.K. operations.

Key recently played an instrumental role in securing an exclusive deal to sell the iPhone in the U.K., having flown out to California with Telefonica's Executive Chairman Cesar Alierta, to discuss terms and conditions with Apple Chief Executive Steve Jobs.

"Under Matthew's leadership, O2 U.K. has grown its revenue and profitability more than all of its competitors combined and has become a partner of choice in the U.K. market, with highly successful collaborations with world-leading brands such as Tesco and Apple," said Alierta Thursday in a statement.

While O2 has grown from being a laggard to the UK's leading mobile phone operator in recent years, it has recently suffered several set backs. In Germany, O2 has trailed behind Deutsche Telekom's T-Mobile and it laid off 700 staff in July.

It also said last month that U.K. new subscriber additions were behind those of rivals France Telecom's Orange and T-Mobile in the last quarter.

"The question of when, rather than if, has been answered as Peter Erskine relinquishes the reins at Telefonica O2 Europe," said Dresdner Kleinwort analyst Robert Grindle. "Matthew Key is a good replacement and maintains the veneer that O2's independent identity and culture is maintained."

"Mr Erskine has done a good job for O2 shareholders and recently for Telefonica but his copy-book has recently been blotted by German business performance which has disappointed. This news suggests more stress fractures are likely," he added.

O2 said that the management change was unrelated and that the company has already earmarked EUR3.5 million in capital expenditure to expand its mobile phone network in Germany in the next three years.

O2 also said Thursday that Jaime Smith, who became Chief Executive of its German operations in June, will also become Chairman of the Supervisory Board of Telefonica O2 Czech Republic.

Smith previously headed the Czech business and was involved in its turnaround and the launch of fixed-line and internet television services. Telefonica O2 Czech Republic is an independent company that is 70% owned by Telefonica and listed on the Prague Stock Exchange.

A successor for the U.K. Chief Executive role has yet to be named.

-By Daniel Thomas, Dow Jones Newswires; 44-20-7842-9264; dan.thomas@dowjones.com

(END) Dow Jones Newswires

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