Three parent company Hutchison Whampoa has made a move for O2 in a deal potentially worth over £10bn.
The agreement comes amid a period of intense activity in the mobile market, after BT made a £12.5bn bid for EE in December.
Hutchison confirmed the move in a note on its website, saying that it has now entered into "exclusive negotiations with Telefónica over a period of several weeks for the potential acquisition of Telefónica's UK subsidiary, O2 UK".
The note explains that the deal would be for £9.25bn upfront followed by another £1bn in ongoing payments from Hutchison's cash flow from its combined businesses.
Telefónica confirmed the talks, stating that the deal makes good financial sense for the business.
"This operation marks another step in Telefónica’s transformation to become a leading digital telco and to accelerate sustainable long-term growth while maintaining an attractive remuneration policy," the firm said.
If this and the BT deal go through, the UK mobile market will face a radical overhaul by effectively relegating former leader Vodafone to last position, as noted by Kester Mann, principal analyst at CCS Insight.
“If approved, the deal would transform the UK mobile market. It would create a new leader with over 30 million customers and a market share of 41 percent. It would also relegate Vodafone to last place in its home market," he said.
“The agreement is a win-win for both companies, which were looking increasingly vulnerable as pure-play mobile operators in a market rapidly transitioning towards multi-play.”
However, one hurdle that could slow or possibly rule out any deal is competition concerns from regulators, notably Ofcom, as Mann explained.
“Any agreement would provoke heavy scrutiny from competition authorities. Unlike the proposed acquisition of EE by BT, this deal would reduce the number of mobile operators from four to three," he said.
"Ofcom has worked hard to maintain the UK as a four-player market and would have significant reservations."
The deal will no doubt sound alarm bells at Vodafone, which is reportedly considering an acquisition of its own to boost its standing in the market. Virgin Media owner Liberty Global was cited as a potential purchase.
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