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Official: Sky to buy O2 and BE's home broadband product in £200m deal

Acquisition plan revealed exclusively by El Reg in January

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BSkyB has swooped in on the consumer broadband and fixed-line biz of Telefónica UK-owned O2 and BE with a proposed deal worth up to £200m.

The Register exclusively uncovered in January that Sky execs had been spotted sniffing around O2's office. We also revealed that the mobile telco was effectively squeezing all it could out of the service before looking to sell it off to the highest bidder.

Broadcaster Sky, which moved into the broadband market six years ago, told the City this morning that it planned to buy 02 and BE's home broadband, phone and fixed-line rental customers for £180m.

It added that an extra "contingent" amount not exceeding £20m would be handed to Telefónica UK depending on what it described as a "successful delivery and completion of the customer migration process".

As El Reg was first to report last month, O2's migration of its local-loop unbundling (LLU) broadband service over to a single core network was hit by a big delay. The 35-week work was originally scheduled to be finished in around October 2012, but the company confirmed to us last month that the work won't be finished until the middle of this year.

Meanwhile, Sky's buyout - subject to regulatory approval - is expected to be completed in April this year, at least a month before the LLU migration will have been completed. All of which probably explains the £20m extra cash offer to O2. If the migration doesn't hit any major hiccups, O2 will pocket more from the sale.

Sky, which has 4.2 million broadband customers on its books, said:

Post completion, O2 and BE customers will be migrated onto Sky’s fully unbundled network, supported by a nationwide all-fibre core, which reaches 84 per cent of all UK homes.

Your correspondent noted last month that O2 was fixated on 4G and had ducked questions in recent months about investing in fibre for its broadband service. Today's statement from Telefónica UK boss Ronan Dunne confirmed this morning what seemed obvious to Vulture Central's networks desk for some time. He said:

As we focus on delivering best-in-class mobile connectivity, including next generation (4G) services, we believe this agreement is the best way of helping our customers get the highest quality home broadband experience from a leading organisation in the market.

In 2007, O2 became the first major ISP to make a commercial offering of ADSL2+ to customers, after it bought Be Unlimited for £50m in 2006. Sky's planned acquisition may well upset some of the thousands of subscribers who are with O2 and BE.

Ovum telco strategy analyst Emeka Obiodu noted that the LLU market was effectively dead in the water. He said in response to Sky's proposed acquisition:

Local loop unbundling has largely run its course and any broadband provider that wants to remain relevant in the future will need to outline a path to fibre. But that costs money. And with retail prices so low, and the return on investment tough to earn, pure-play broadband providers will struggle to survive.

Once the deal is done, Sky will become the second biggest broadband provider behind national telco BT. The acquisition effectively pushes Virgin Media - which is currently being bought out by Liberty Global - into third place.

BE told its customers this morning that the process of moving them over to Sky's network will take some time and said that the migration probably won't be completed until the end of this year. ®

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