EU regulators to block Telefonica's sale of O2 UK to Hutchison - sources

By Foo Yun Chee

BRUSSELS (Reuters) - EU competition regulators will veto CK Hutchison Holdings' 10.3 billion-pound deal to buy O2 UK from Spanish group Telefonica (TEF.MC) to become Britain's biggest mobile network operator, two people familiar with the matter said on Monday.

Hutchison, controlled by Asia's richest man Li Ka-shing, had always faced an uphill battle getting EU clearance for the deal because merging O2 with its own Three UK would reduce the number of rival mobile network operators in Britain to three.

It will be the first time that European Competition Commissioner Margrethe Vestager has expressly rejected such a deal, although Scandinavian groups Teliasonera (LSN.ST) and Telenor (TEL.OL) abandoned plans to merge their Danish mobile subsidiaries in September last year after Vestager said she wanted four network operators in that market.

The European Commission will this week seek the approval from national competition regulators for its decision to reject the Hutchison deal, the sources said. Such a move is usually a formality.

Commission spokesman Ricardo Cardoso, Hutchison and Telefonica declined to comment. The EU watchdog has set a May 19 deadline for its decision.

A package of concessions designed to boost smaller rivals failed to address the Commission's belief that the merger could lead to less competition and higher prices in Britain, the people said.

Bowing to the Commission's demand to create a fourth network operator also proved impossible as it failed to find a buyer for either O2 or its own UK mobile subsidiary Three. Last week, sources said Hutchison declined to offer fresh concessions.

Hutchison will be hoping that the Commission will not come to a similar conclusion in its investigation into its propsed merger in Italy of 3 Italia with Vimpelcom's (VIP.O) Wind, a deal which analysts say could be equally challenging to get past the regulators, since once again it would reduce national market rivalry to just three network operators.

(This story has been refiled to correct punctuation and add European Commission, Hutchison and Telefonica declining to comment)

(Additional reporting by Kate Holton in London and Andres Gonzalez Estebaran in Madrid; Editing by Greg Mahlich)