PETER ERSKINE, chief executive of mmO2, yesterday hinted that he was prepared to turn the tables on KPN, its one-time predator, and make an offer for E-Plus, the Dutch company’s German mobile operation.

The upbeat remarks, made as the British company reported its first annual profit, reflect mmO2’s growing confidence that O2 Germany can leapfrog E-Plus and seize its number three position in Europe’s biggest economy.

“If we can overtake KPN, everything is possible,” Mr Erskine said. When specifically asked whether he would consider making an offer for his rival’s German arm — which could be worth £2 billion — Mr Erskine said: “It is a much more realistic option than it was a year ago.”

A merger of the UK and Dutch companies’ German arms could save about £300 million a year, mmO2 believes.

In February, mmO2 turned down a paper-based bid from KPN, which at the time was worth about 108p a share, claiming it undervalued the company.

In the year to March, O2 Germany reported recurring revenues of €1.94 billion (£1.35 billion), up 32 per cent in local currency.

By contrast, E-Plus is on track to report revenues of about €2.34 billion (£1.57 billion) in 2004, and is growing at a rate of about 12.5 per cent.

Mr Erskine said: “We’re very confident that we can overtake KPN in Germany in a sensible timeframe, although we’re not setting a specific target. But we’re growing at 32 per cent, and they’re growing 13 per cent, and you can do the maths.”

MmO2 insiders said that there were no active discussions with KPN at the moment. They added that Mr Erskine’s remarks were designed to emphasise that the company does not want to be portrayed simply as an acquisition target.

The mobile phone group earned pre-tax profits of £95 million in the year to March, compared with a loss of £10.2 billion a year ago. The company added that it was considering whether it would pay a dividend in the future, and would update investors on its policy in November. In the UK, the company increased recurring revenues by 16 per cent to £3.18 billion — comfortably beating its 10 per cent target of a year ago.

It added that it would grow another 5 to 8 per cent this year, despite the loss of two contracts with its former parent, BT.

In a separate announcement, BT said that Vodafone would replace mmO2 as its partner in the business market. Vodafone will supply airtime to BT in the UK, allowing the fixed-line group to sell its own-brand mobile services into the business market from November.

The existing BT business contract was worth about £100 million a year to mmO2, or 3 per cent of its UK revenues. In addition, Vodafone will supply all BT employees with mobile phones, in a related deal worth another £30 million a year.

Mr Erskine, however, said that the loss of the contract was “immaterial”, and that the company would compete fiercely to retain the business customers that it currently handled for BT. “We have our own sales force now, and we are quite pleased to be driving our own canoe in this space.”

MmO2 said that it would launch a third-generation fast-internet service in Germany in July, but that the UK would wait until around September, when its rivals Vodafone and Orange are also expected to launch such a service.

MmO2 shares were unchanged at 95p.

SUCCESS OF BT SELL-OFFS

MmO2 and Yell were sold by BT in 2001, as the telecoms giant hit financial difficulties after running up £30 billion of debt from ill-judged global expansion.

Independence has been good for Yell and mmO2, which have had to focus on their own bottom lines to survive.

Since demerger from BT in 2001, mmO2’s shares have risen 15 per cent, while BT’s have fallen 40 per cent. Yell, first acquired by venture capitalists, is up 12 per cent since its 2003 float.

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