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Comment: Should KPN take over O2? How about the other way round!

Nobody I could find at 3GSM in Cannes was convinced by the argument that the failure of KPN's first attempt to take over MMO2 was the end of the deal. Well, there was one: a PR man for O2 who said "we've dealt with that." And now, there's someone else: but he thinks O2 should take over KPN

His argument was picked up by The Sunday Times business section today, where Nick Hasell quotes financial research analyst Andrew Beale - who has sent out a note, arguing: "When KPN sought to merge with MMO2, it was a case of a lowly rated company buying a higher-rated one, diluting shareholders. The rationale for merging two Mr Smalls into a Mr Strong are clear, but KPN's proposed structure was destined to make its shareholders Mr Grumpy."

In Cannes, most people were arguing that O2 is just too small to survive on its own any more. That's probably a good argument (whether it's true or not, time would tell) say observers, but being global isn't the only thing O2 needs for a safe future.

"My take," said one senior executive inside T-Mobile at the show," would be that the problem with O2 is more to do with its style. It remains very much the offshoot of BT which it was; a bureaucracy."

Beale's argument, as summarised by the Sunday Times, is that MMO2 has over-rated shares, which should be cashed in to buy KPN - reminding me of the takeover of Time-Warner by AOL when its shares were inflated by fantasy.

Apparently, Beale sees "an enormous £3.3 billion of synergies — mainly from eliminating duplicated network spending in Germany" from a takeover.

The deal - as usual - is analysed from the point of view of how shareholders would benefit, and not from how well the company would perform. The lesson of AOL, surely, is that a mouse drunk on pep pills remains a mouse, and doesn't have the skills to manage the body of a lion.

Time Warner executives are now firmly in control of that merged company, and if O2 is to benefit from joining KPN, the important thing is not how best to inflate the value of the shares, but which management team will be in charge.

Hasell says: "KPN has more than £5 billion of debt, but the strong earnings from its fixed-line business allow it to support more — so enabling it (or the enlarged group) to pay a large special dividend to shareholders before spinning off the fixed operations. If MMO2 shareholders can claim half the benefits of the deal, Arete's estimate of the company's value rises to 137p a share, compared with 111p on Friday. KPN does just as well."

It won't happen, as Hasell admits. He quotes CEO Peter Erskine at MMO2 explaining that it is too early for him to be making "bold expansionist moves."

That, in a nutshell, is what is wrong with MMO2, said observers at Cannes. If it doesn't expand, it dies - or gets eaten. My money is on it getting eaten.