OREANDA-NEWS. The planned sale of Telefonica's O2 UK operations to Hutchison Whampoa could be credit positive for the Spanish group, and for other UK network operators, Fitch Ratings says.

The sale is in line with Telefonica's strategy of focussing on Latin America and other countries where there is potential for it to develop a strong market position. The UK business is performing well and contributes to geographic diversification, but O2's competitiveness could weaken in the long term if bundled services such as quad-play (mobile, fixed-line, broadband and television) start to take a bigger share of the market.

Telefonica is better prepared for these developments in other markets such as Brazil, where, subject to regulatory approval, it is acquiring Global Village Telecom. This will add fixed-line, broadband and pay-TV services to its customer offering.

The impact of the proposed sale of O2 UK, worth up to GBP10.25bn in cash, will depend on how the proceeds are used. Even if Telefonica did not raise any equity for its planned acquisition of GVT, the proceeds could reduce leverage by up to 0.5x operating income before depreciation and amortisation.

This would be a significant cushion for Telefonica, whose leverage is at the higher end of the 'BBB+' level. But it also faces several other challenges, including declining domestic EBITDA, the integration of recent acquisitions, and upcoming spectrum auctions in Germany. These are reflected in the Negative Outlook.

Regulatory approval for the O2 UK sale is also likely to take many months. If it is approved it is also likely to be conditional on competition remedies similar to those applied in Germany, when Telefonica had to sell some network capacity to mobile virtual network operators (MVNOs).

We have previously stated that the credit impact on Hutchison, which owns the UK's 3 network, cannot be determined as the financing plan has not been announced. But the deal would significantly enhance its UK market share and would cut the number of main UK operators to three from four. Even if there is a requirement to provide capacity to MVNOs, the competitive environment should become less intense, which would be positive for Vodafone and EE.

Scale is the main driver of the O2 deal, but if BT Group's acquisition of EE goes ahead the convergence of fixed and mobile networks could lead to more changes in the medium term. There is therefore the potential for more acquisitions or partnerships in the UK market, as Vodafone, Sky Talktalk and Virgin Media could still be looking at ways to meet the potential quad-play threat from BT/EE, or to bulk up as Hutchison is doing with O2.