Will Telefonica deny O2 the oxygen of publicity?

O2 has put an end to months of speculation by agreeing a £17.7bn takeover offer from Spanish telecoms giant Telefonica. But rather than breathe new life into the brand, some people believe the mobile operator’s new owner may strangle it.

O2 has put an end to months of speculation by agreeing a &£17.7bn takeover offer from Spanish telecoms giant Telefonica. But rather than breathe new life into the brand, some people believe the mobile operator’s new owner may strangle it.

Observers point to rival Orange, claiming it has never been the same since its takeover by German company Mannesmann, and subsequently by France Telecom. Arguably the world’s most innovative mobile company during the 1990s, Orange lost momentum when early backer Hutchison – which has since launched third-generation service 3 – pulled out and it was acquired by Mannesmann. When Mannesmann was in turn bought by rival Vodafone, the competition regulator decreed that Orange be sold again and France Telecom swooped with a &£25bn bid in 2000.

Strategy Analytics senior analyst Sara Harris says: “Orange was very friendly and customer-facing before it was taken over. But under France Telecom it has become corporate, boring and, frankly, not very good. I think there will be a bit of that with O2.”

The deal will give Telefonica entry into the UK and Germany – two of Europe’s biggest markets – but O2’s brand and management structure will remain in place. The company has promised no compulsory redundancies will take place because of the lack of overlap between the two.

Sources at O2 say that Telefonica’s plans to stick with the existing management team will keep the brand alive. O2’s business will continue to be led by chairman Sir David Arculus and chief executive Peter Erskine, both of whom will also join Telefonica’s board.

O2, which was demerged from BT in 2001, recently reported that it had 15 million customers in the UK, putting it ahead of Vodafone and Orange, but it is the only one of the five networks in this country without serious financial backing or global reach. Orange and T-Mobile are owned by France Telecom and Deutsche Telekom respectively, 3 is the mobile subsidiary of Hutchison Whampoa and Vodafone has become a global giant in its own right.

Ovum senior analyst Marta Muñoz says the takeover will benefit both parties. “O2 is operating in a market with large players,” she says. “It had become too small and sooner or later was going to be eaten. The deal opens the door to the highly lucrative Spanish market, as well as Latin America, which is an area with tremendous growth potential.”

O2 is the current darling of the mobile industry, thanks in part to its famous “blue bubble” branding. The company’s advertising agency, Vallance Carruthers Coleman Priest (VCCP), won the Grand Prix at last year’s IPA Effectiveness Awards for transforming the brand, and O2 says it does not anticipate any changes to its agency relationships after the deal goes through. Yet one reason VCCP sold out to Chime earlier this year (MW July 21) was the perceived vulnerability of O2, its principal client, to a takeover bid.

VCCP managing partner Ian Priest says: “Telefonica has bought the brand and the management team, and that’s positive for us. It’s going to take O2 further afield.”

O2 was first linked with Telefonica earlier this year. Deutsche Telekom and Dutch group KPN admitted soon afterwards they had tried, but failed, to put together a joint bid. Some analysts think the Telefonica deal could yet be hijacked by a rival after O2’s shares rose above the offer price of 200p to a tell-tale 204.75p, suggesting an alternative bidder.

Whatever the outcome, one certainty is that O2 is about to relinquish its independence. It will no longer have to answer questions about its size and scale but, as history shows, takeovers are not always good for brands.

Robert Lester

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