Hutchison to buy Telefonica UK unit for $15.4 bln

* Telefonica exiting UK to cut debt

* Deal is boldest move in Europe for Hutchison (HKSE: 0013-OL.HK - news)

* Consolidation heats up in UK telecoms sector (Adds more details on UK consolidation, Telefonica)

By Julien Toyer and Denny Thomas

MADRID/HONG KONG, Jan 23 (Reuters) - Li Ka-shing's Hutchison Whampoa Ltd has agreed to buy Telefonica's British mobile unit O2 for up to 10.25 billion pounds ($15.4 billion), hastening the consolidation of Britain's telecoms industry.

Hutchison already operates the Three Mobile network in Britain, and buying second-ranked O2, which has about 22 million subscribers, from the Spanish group will make it the top mobile operator in the country.

The move comes only weeks after former state monopoly BT entered exclusive talks with the owners of EE, Britain's biggest mobile operator to create a dominant provider of fixed and mobile phones and internet services. BT opted for EE rather than buying O2.

The deal is also the boldest bet yet for Asia's richest man, Li Ka-shing, as he revamps his European telecoms business.

Having been in at the start of the mobile revolution in Britain in the 1990s as the founder of Orange (Taiwan OTC: 4554.TWO - news) , Hutchison returned in 2003 with the launch of its third generation Three network.

However, returns from the Three business, which operates in six European countries, have lagged other parts of Li's ports-to-property empire.

For Telefonica, the deal marks a key step in the reorganisation of its business started two-and-a-half years ago and that has seen the company shedding non-core operations to focus on its biggest markets Spain, Brazil and Germany.

The Hutchison offer values O2 UK at about 7.5 times EBITDA, in line with BT's planned 12.5 billion pound takeover of EE, which was valued at about 8 times.

Analysts and investors welcomed the deal, which will consist in an all-cash transaction of 9.25 billion pounds, with another 1 billion pounds to be paid when the combined business reach certain cash flow targets.

Hutchison shares rose 3 percent, outpacing a 1.3 percent rise in Hong Kong's benchmark Hang Seng share index while Telefonica's shares gained 2.8 percent in Madrid, also outperforming the 1.4 percent rise in the benchmark IBEX index .

MORE UK CONSOLIDATION

The marriage of Three Mobile and O2 UK may now trigger more acquisitions or tie-ups in Britain, where the market is currently split between four mobile network operators and four separately owned fixed-line and broadband providers.

Pay TV company Sky (Other OTC: BSYBF - news) and mobile operator Vodafone are seen as potential partners. Vodafone would have access to Sky's content and Sky could offer branded mobile services using Vodafone's network.

British regulator Ofcom, which has been keen to retain four national players and designed its last airwaves auction to meet that end, could force a combined Three and O2 to give up some airwaves, and offer good terms for mobile virtual network operators to enhance competition.

Hutchison, which bought Telefonica's Irish business last year, will fund the deal with a 6 billion pound bank loan. The company is in talks with private equity firms and others to bring in minority partners, who would be offered not more than a 30 percent stake.

The proposed O2 deal comes just two weeks after the Hong Kong tycoon undertook a major overhaul of his sprawling operations, boosting its acquisition firepower, which it could now use in Europe to snap up businesses from operators who have been battered by the continent's debt crisis.

Analysts expect Hutchison to consolidate its Italian operations next. It operates businesses in Italy, Britain, Sweden, Denmark, Austria and Ireland (Other OTC: IRLD - news) . In Asia, Hutchison has mobile operations in Indonesia, Vietnam and Sri Lanka.

The operation could also pave the way for more corporate restructuring at Telefonica, which will now be in a better financial position to keep reorganising its business in Latin America, where it hopes to achieve higher growth rates than in more mature European markets.

The cash obtained from the sale of O2, which Telefonica bought in 2006 will help the Spanish group cut debt to around 35 billion euros according to analysts' estimates and support one of the highest dividend yields in the sector, at 5.7 percent.

Telefonica recently bought GVT in Brazil and is eyeing additional acquisitions in the country. Analysts also expect the group to bolster its Mexican operations.

In Europe, Telefonica is now focusing on the Spanish and German markets, where it is investing massively in new mobile and fixed networks that are consuming a lot of cash and eating in its margins.

UBS (NYSEArca: FBGX - news) is advising Telefonica while Moelis and HSBC are advising Hutchison. HSBC is also financing the deal. (Additional reporting by Donny Kwok and Elzio Barreto in Hong Kong, Kate Holton and Paul Sandle in London and Leila Abboud in Paris; Editing by Lisa Shumaker, Alex Richardson and Keith Weir)