DEUTSCHE TELEKOM, the German telecoms group, was last night considering making a counterbid for O2, the British mobile phone company that has received a record £17.7 billion all-cash offer from Telefónica of Spain.

Yesterday’s agreed bid from the Spanish group, which was put together in less than three days, represents the biggest all-cash offer tabled for a British company.

Despite Telefónica’s 22 per cent premium on O2’s closing price on Friday, potential regulatory obstacles and the burden of an agreed £180 million break fee, Deutsche is still understood to be weighing up its options and is deciding whether to come forward with a rival bid.

To outbid Telefónica, the German player would be expected to pay as much as another 50p a share on top of Telefónica’s 200p offer partly in recognition of the potential regulatory hurdles, analysts said. The additional £180 million, or 1 per cent of the total bid value, was insisted upon by Telefónica, should its all-cash offer fall through.

Lobby groups expressed concern over the increased use of such fees in acquisition deals and their ability to effectively block rival bidders. In theory, break fees are supposed to cover the costs of making a bid. The cost to Telefónica of bidding for O2 would include the price of securing the debt to do the deal from Royal Bank of Scotland, Citigroup, and Goldman Sachs, and advisory fees. The entire £17.7 billion consideration is to be funded by borrowing from those banks.

But a spokesman for the Association of British Insurers said: “The break fee should reflect the general expenses incurred of the company, not act as a poision pill to deter bidders.”

One banker involved in the deal said: “It is a lot of money in absolute terms but this is the largest cash offer that has been made in the UK so the break fee is one of the largest break fees.”

Analysts said that, aside from the break fee, Deutsche Telekom would also be pushed to pay a price that recognised the regulatory risk that it would face in the UK and German markets, where it already holds key positions.

It is believed that the time taken to sort out such issues could push back any deal by several months.

KPN, the telecoms group whose £9.4 billion offer was spurned by O2 last year, said that it had no plans to try again.

In an irony that will not have been missed by its former owner, O2’s market capitalisation also surged pass BT’s. Under the tie-up with Telefónica both Mr Erskine, who stands to gain nearly £8 million in share and option packages, and David Arculus, the chairman, will take seats on the Telefónica board.

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