Sky has held talks on a possible strategic partnership with O2 after approaching the UK mobile network’s Spanish owner, Telefónica.
The talks come as BT, arguably Sky’s biggest rival, negotiates a potential £12.5bn acquisition of mobile operator EE. That deal would give BT the ability to offer customers a “quad play” package of home phone, broadband, TV and mobile.
Sky, which broadcasts Game of Thrones and Girls on Sky Atlantic, does not want to risk being left as the only big UK broadband provider that cannot offer a quad play package.
BT had been weighing a potential deal with either EE or O2, but decided against pursuing O2 in December.
However, one source with knowledge of the Sky talks cautioned that they were at an early stage and any agreement was more likely to be a partnership than an outright acquisition.
Telefónica is also in discussions with Hong Kong-based Hutchison Whampoa, which owns the smallest of the UK’s big four mobile phone operators, 3 UK, and could reportedly offer up to £9bn for O2.
The combination of O2 with 3 would see the merged operator leapfrog the market leader, EE, as well as Vodafone to become the biggest mobile network in the UK.
Sky is unlikely to acquire O2, not least because the company recently spent billions acquiring its sister pay-TV companies in Germany and Italy, although it could potentially offer Telefónica shares in the business as part of a deal.
“We can see the strategic rationale for a Sky-O2 deal, particularly if the German assets of both companies were also involved,” said Andrew Hogley, a telecoms analyst at Espírito Santo bank. “But we do not believe Sky has the financial strength to acquire O2’s assets.” Last year Sky paid £200m for O2’s fixed-line and broadband business.
A more likely deal would involve a mobile virtual network operator agreement, or MVNO, where Sky would resell O2 phone contracts as part of a suite of products including pay-TV, broadband and home landline.
The talks “suggest Sky has decided to commit itself to the quad-play route, which is an unproven strategy in the UK”, said Ian Whittaker, a media analyst at Liberum.
“From a strategic standpoint, we are not sure this would fix its problem in the UK – that is, slowing growth … with Virgin Media also becoming more aggressive,” Whittaker added.
Sky has also held talks with Vodafone over potential partnership opportunities. The mobile company sold its stake in the US telecoms group Verizon Wireless for $130bn (£85bn) and returned more than £50bn to shareholders last year, but retained a war chest for possible acquisitions. It has said it intends to join the increasingly crowded broadband and televison market this spring.
Such a move would put it in competition with EE, which launched a TV set-top box in October, as well as BT and TalkTalk.
Whittaker said if Sky were to engineer a buyout of O2 it could push Vodafone into a deal with Liberty Global, which owns Virgin Media in the UK.
“Otherwise Vodafone would be left facing two rivals [Sky and BT] both offering a credible quad-play offer,” he said. “The only way to counter that would be a Vodafone-Virgin Media tie-up.”
The talks come as Sky is preparing to battle BT for control of the next three-year TV rights package for UK Premier League football.
In 2012, BT broke Sky’s stranglehold, forcing a bidding war that saw the Premier League bag £3bn, a 71% increase over the previous deal.
Bids are due by 6 February, with Sky and BT potentially joined by Discovery – which owns Eurosport and counts the chairman of Liberty Global, John Malone, as its biggest shareholder – and the Qatar Investment Authority, which finances al-Jazeera.
