3G excesses fuel O2 takeover rumours

The vast sums of money spent by O2 on 3G mobile licences at the start of the decade make it a tempting takeover target today, according to analysts, but not just because of the potential of 3G services.

Morgan Stanley raised its forecast for O2's share price to 175p on Wednesday, which pushed shares 3p higher to 152p. Morgan Stanley is upbeat because it believes O2 is an attractive potential acquisition, largely thanks to the billions it spent on 3G licences when it was part of BT.

£10bn acquiring 3G licences in the national auctions of 2000, including £4.03bn in the UK auction and £5.13bn in Germany. In 2003, it admitted it had overspent massively, and slashed the amount it values these licences by £5.9bn.

As a result of this writedown O2 has accumulated some £5.2bn in tax credits in Germany and the UK, meaning that O2 will pay less tax in both countries for the next few years. Morgan Stanley is confident that these tax credits would become more valuable if O2 was taken over by another company, which could then offset its own tax bill against them.

"As long as the predator is in the same line of business, the combined company can get away with paying tiny amounts of tax for many years," reported the Independent  on Thursday.

In its research note, Morgan Stanley pointed out that O2 has already been the subject of takeover interest. A takeover bid would probably sent O2 shares soaring, and Morgan Stanley believes this hasn't been fully priced into the current market value.

"Deutsche Telekom and KPN recently discussed a potential joint bid for O2, and we think the market will continue to discount consolidation possibilities," said Morgan Stanley.

Analysts have long speculated that there could be consolidation in the UK mobile sector, and even that BT could buy back O2 which it originally spun off in 2001.