Sky and Liberty Global join race to buy O2 from Telefonica

Sky has joined the throng of UK companies bidding to buy the UK mobile operator O2 from Spanish owner Telefonica, according to local media, with US media giant Liberty Global also apparently interested in a potential purchase.

Spanish newspaper Cinco Dias said Sky and TalkTalk were both engages in talks with Telefonica over possible bids for O2.

"There is also speculation that Liberty Global is also showing interest, without forgetting the rumours about Talk Talk," reported El Economista.

"Sources close to negotiations told the Spanish newspaper Cinco Días said that "nothing was being ruled out". However, they added that all talks that have been held up to this point have been informal and non-binding."

Some City folk questioned whether TalkTalk would be a likely bidder having already this month splashed the cash with the purchase of Tesco's online video offering and broadband business.

Broker Liberum said if the rumours about Sky were true, and that it has decided to commit itself to the "quad-play" route, "it would presumably mean some sort of capital raise, which would then allow Sky to maintain financial flexibility over the Premier League rights".

At the weekend it was reported that Telefonica was engaged in talks with Hong Kong magnate Li Ka-shing, the owner of the Three UK mobile network, over a potential sale of O2 for as much as £9bn.

This followed December's confirmation from BT, which originally sold O2 to Telefonica in 2005, that it was in talks to buy O2.

Telefonica, which acquired what is the UK's second-biggest mobile phone operator for £17.7bn, now needs to reduce its debts, which have been hit by the country's struggling economy.

Analysts at Liberum note that the four-way play of TV, broadband, fixed telephony, mobile, is not a proven concept in the UK market although it has worked in elsewhere, such as in France.

"From a strategic standpoint, we are not sure this would fix its problem in the UK, i.e. slowing growth, a more aggressive competitor in BT (with Virgin Media also becoming more aggressive) and that it does not own its fixed-line infrastructure, which its rivals do."

As a final point the broker suggests that if Sky does buy O2, the most likely knock-on effect is a Vodafone-Virgin Media combination, as Vodafone "would be left otherwise facing two rivals both offering a credible Quad-play offer".