Sky the kingmaker in O2 buyout battle as private equity giants size up mobile deal
Sky has emerged as potential kingmaker in a looming £9bn bid battle between private equity giants for mobile operator O2. The pay-TV company is being courted by at least five buyout specialists seeking its heavyweight backing for their bids, City sources revealed.

Discussions are in their early stages, but involve a who’s who of big private equity firms, including KKR, TPG, Bain Capital, Apollo, CVC Capital Partners and Apax Partners.

Sky’s role in a bid could prove crucial as it plans to launch its own mobile service based on the O2 network later this year. If it backed a buyout, Sky would not seek a stake in the operator, but could put £2bn into a strategic partnership that would give it better wholesale terms while helping O2 improve its network.

Such an arrangement would be a boost in a competitive sale of Britain’s number two mobile network. It would provide greater certainty over O2’s earning power and allow private equity firms to bid more, City sources said, making a buyout a more credible alternative to a stockmarket float.

It is understood that discussions between Sky and potential private equity partners are focused on the company paying for a set portion of capacity on the O2 network over a decade or more.

There have also been suggestions that Sky’s “backhaul” network infrastructure could be used to carry O2’s mobile data at lower cost. As demand for mobile internet access rockets, some of O2’s potential new owners want to increase coverage and capacity cheaply by linking tiny masts known as femtocells to Sky’s broadband network.

The operator’s management, led by chief executive Ronan Dunne, are reviewing options for a sale on behalf of its current owner, the Spanish telecoms giant Telefonica. It had hoped to offload its UK business for £10.3bn to CK Hutchison, the owner of rival operator Three, but the deal was blocked by European competition regulators.

As part of failed attempts to get the deal approved, Hutchison agreed a long-term wholesale deal with Sky that could effectively be revived and expanded on if a sale to private equity goes ahead.

City observers highlighted the potential role of Andrew Sukawaty, who is a non-executive director at Sky and advises the private equity firm Warburg Pincus on telecoms investments but it is understood Warburg Pincus has not yet made an approach to Sky.

Mr Dunne is also understood to be exploring his options
to front the buyout, although Telefonica may instead attempt a flotation that would allow it to retain a stake. It made a similar move when it listed O2 Germany.

O2’s management is also believed to be examining its portfolio of mobile masts to see whether it could be sold off for cash, amid strong demand for such infrastructure assets across Europe. However, one buyer of masts said it did not expect a sale because of O2’s network sharing partnership with Vodafone, which proved fatal to Hutchison’s merger plans.

As well as seeking Sky’s support, private equity firms are understood to be sizing each other up to form bid consortia to tackle what would be the UK’s second biggest buyout, behind the £12bn sale of Alliance Boots in 2007.

As well as seeking Sky’s support, private equity firms are understood to be sizing each other up to form bid consortia to tackle what would be the UK’s second biggest buyout yet, behind the £12bn sale of Alliance Boots shortly before the financial crisis hit. Given O2’s strong cash flow, a private equity buyer would be likely to immediately load it with cheap debt to deliver higher returns.

Such leveraged buyout structures have previously caused controversy in the telecoms industry. Apax and TPG faced lawsuits from the liquidator of the Greek mobile operator Wind Hellas, who accused them of plundering and crippling the company. It was loaded with debt and went bust two years after the private equity giants sold it on, but a Luxembourg court last year found no wrongdoing.

All parties declined to comment.