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DUBLIN/MADRID (Reuters) - Indebted Spanish group Telefonica (TEF.MC) has agreed to sell its O2 Ireland mobile business for at least 780 million euros ($1 billion) in cash to Hutchison Whampoa's 0013.HK local unit 3 Ireland, it was announced on Monday.
The deal, which is subject to regulatory approval, would quadruple 3 Ireland's market share to 37.5 percent and follows Hutchison's failed bid last year for eircom, which owns the country's third-biggest mobile operator Meteor.
For Telefonica, which has been hit hard by the downturn in its home market, the sale will help it in its aim to cut debt by a further 5 billion euros by the end of the year.
In the past decade Hutchison has built a presence in six European markets, including Britain and Italy, but has struggled to make a profit as it remains smaller than domestic rivals.
Last year its Austrian unit bought Orange Austria from France Telecom FTE.PA and more recently has been in talks with Telecom Italia (TLIT.MI) about merging with its local unit 3 Italia.
"This gives us the scale and financial strength to drive competition," said Robert Finnegan, chief executive of 3 Ireland. "We will continue to be aggressive in the market going forward and we would like to be number one in due course."
He said he was confident the deal would be completed in between six and nine months as it will likely be referred to the EU for competition review.
The EU's antitrust watchdog has been concerned in the past when mobile markets go from four to three players because consumer prices could rise
02 and 3 Ireland together would give Hutchison a market share of 37.5 percent, just behind Vodafone's (VOD.L) 39.4 percent and ahead of Meteor's 19.7 percent, according to the latest quarterly data from the Irish regulator. Virtual operator Tesco Mobile (TSCO.L) trails in fourth place with 3.4 percent. Currently 3 Italia has a market share of 9.4 percent.
A 2 billion euro offer from Hutchison Whampoa for Meteor parent eircom was rejected last year in favor of a debt-restructuring deal that put the group's most senior lenders in control.
The terms of the Telefonica sale include an additional deferred payment of 70 million euros if certain financial targets are achieved and the phasing out of the O2 brand, Hutchison said.
The combined firm will have 120 stores in Ireland, whose domestic economy continues to stagnate, five years after the economy collapsed when a housing bubble burst. The two companies had combined revenues of 803 million euros in 2012.
Telefonica, which piled up debt during a decade-long expansion into Latin America aims to cut its borrowings to under 47 billion euros by the end of the year from 52 billion at the end of March in a bid to maintain its investment grade rating.
Telefonica also sold some Central American assets in March for $500 million and could consider a sale of its Czech business, analysts have said.
O2 Ireland generated 136 million euros of revenue in the first quarter, lower than any of the company's other European businesses, and down 12 percent year-on-year.
Analysts at Espirito Santo said the O2 Ireland sale was a good move for Telefonica despite the sale price being at a 10 percent discount to fair value, since the business was small and not central to its strategy.
"This should enable Telefonica to reduce its leverage by approximately 1 percent at the end of 2013," they said in a note.
Analysts at Bankia Bolsa pointed to Telefonica's real estate assets and a remaining 5 percent stake in China Unicom (0762.HK) as other likely candidates for sale.
In another sign of consolidation in Europe's telecoms industry, Vodafone on Monday agreed to buy Germany's largest cable operator, Kabel Deutschland KD8Gn.DE for $10 billion.
Deals in the sector globally have risen 141 percent in the year to June 1, according to Thomson Reuters data.
(This version of story corrects paragraph ninth to read "Vodafone's 39.4 percent" instead of "Vodafone's market 39.4 percent")
Additional reporting by Leila Abboud, Tomas Cobos and Anjuli Davies; Editing by Louise Ireland and Greg Mahlich