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* Telefonica exiting UK to cut debt
* Deal set to be Li's biggest ever M&A
* Li's revamped his businesses earlier this month
* Hutchison shares jump more than 4 pct (Adds names of advisers, valuation paid for O2)
By Julien Toyer and Denny Thomas
MADRID/HONG KONG, Jan 23 (Reuters) - Li Ka-shing's HutchisonWhampoa Ltd has agreed to buy Telefonica's British mobile unit O2 for up to 10.25 billion pounds ($15.4billion), as Asia's richest man makes his boldest bet yet torevamp his European telecoms business.
Hutchison already operates the Three Mobile network inBritain, and buying second-ranked O2 from the Spanish group inLi's biggest ever takeover will make it the top mobile operatorin the country.
The company made its first forays into European telecomsmarkets in 2000, but returns from the business have lagged otherparts of Li's ports-to-property empire.
Li and his chief dealmaker Canning Fok have doubled down inresponse, sinking more money into Europe as they look to snap upbusinesses from operators who have been battered by thecontinent's debt crisis.
The proposed O2 deal comes just two weeks after the HongKong tycoon undertook a major overhaul of his sprawlingoperations, which will be split into two listed companies, onefocusing on property and the second on his other businessesincluding telecommunications, ports and infrastructure.
The revamp will boost Hutchison's acquisition firepower byabout $7 billion as it spins off its property assets to CheungKong Holdings Ltd.
"The deal indicates that the group is continuously eyeingEurope to seek future growth," said Alex Wong, a director withHong Kong-based Ample Finance Group.
The marriage of Three Mobile and O2 UK would mark the latestmove towards telecoms consolidation in Britain, where the marketis split between four mobile network operators and fourseparately owned fixed-line and broadband providers.
REGULATORY SCRUTINY
While the deal will attract scrutiny from competitionauthorities, European regulators have allowed the number oftelecoms operators in countries including Austria and Ireland toshrink from four to three through mergers and acquisitions.
"The European Commission has taken a positive view of four-to-three consolidations of mobile in three cases now...and webelieve that the precedents that they have set in thosetransactions will apply for this transaction," Frank Sixt,Hutchison's group finance director, told reporters.
The deal will mark Li's biggest ever acquisition, overtakingHutchison's $7.5 billion purchase of Britain's NorthumbrianWater Group in 2011, according to Thomson Reuters data.
Hutchison shares rose 3 percent, outpacing a 1.3 percentrise in Hong Kong's benchmark Hang Seng share index.
Telefonica's shares gained 2.6 percent in early trading inMadrid, in line with the 2.3 percent rise in the benchmark IBEXindex.
Hutchison said in a statement that it had "agreed to enterinto exclusive negotiations with Telefónica SA over a period ofseveral weeks" for the potential acquisition.
It said it had agreed to pay an indicative price of 9.25billion pounds, with another 1 billion pounds in "interestsharing payments" should the combined business reach certaincash flow targets.
Hutchison will fund the deal with a 6 billion pound bankloan. The company is in talks with private equity firms andothers to bring in minority partners, who would be offered notmore than a 30 percent stake, Sixt added.
In December, former state monopoly BT enteredexclusive talks with the owners of EE, Britain's biggest mobileoperator.
BT had preferred EE over O2, which was acquired byTelefonica in early 2006 and has about 22 million subscribers.
The Hutchison offer values O2 UK at 7.9 times EBITDA, inline with BT's planned takeover of EE, which was valued at about8 times.
Reuters reported in November that Hutchison, whose Three isBritain's smallest mobile network, was waiting in the wings tobuy whichever group BT spurned.
Moelis is advising Hutchison, while UBS is advisingTelefonica, people familiar with the matter said.
NEXT STOP ITALY?
Three Group Europe reported total revenue of HK$31 billion($4 billion) for the six months ended June 2014, a 3 percentrise from a year ago. Its core earnings, or EBITDA, rose 15percent to HK$6.5 billion in the same period.
It operates businesses in Italy, Britain, Sweden, Denmark,Austria and Ireland. In Asia, Hutchison has mobile operations inIndonesia, Vietnam and Sri Lanka.
Analysts expect Hutchison to consolidate its Italianoperations next. In 2013, it approached Telecom Italia with a proposal to merge their mobile businesses wherebyHutchison would have taken a near 30 percent stake in Italy'sbiggest phone operator. But the proposal was rebuffed by TelecomItalia's core shareholders.
It then tried to merge its Italian unit 3 Italia with Wind,a subsidiary of Russian telecoms group Vimpelcom, buttalks have stalled.
When asked whether the company could move quickly toconsolidate Italian operations, Sixt said: "I like to think wecan move very quickly in any circumstance. But you have to haveachieved the right deal for all sides for anything like this tohappen, that was the case in the UK, and that will be the casein relation to Italy."
Last year, Hutchison bought Telefonica's Irish business in abid to boost its market share, though it still trails behind themarket leader Vodafone plc.
Telefonica said in November the British market was a coreone for the company, but it had set as higher priority onreducing its big debt pile and protecting a fat dividend.
It also needed fresh cash to consider potential acquisitionsin Brazil, its biggest market along with its home country, whereit is investing massively to build an optic fibre network. ($1 = 0.66661 pounds) ($1 = 7.7524 Hong Kong dollars) ($1 = 0.8803 euros) (Additional reporting by Donny Kwok and Elzio Barreto; Editingby Chris Reese, Lisa Shumaker and Alex Richardson)
