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O2, the UK subsidiary of Telefonica (TEF - Analyst Report), has been selected as the preferred bidder for the smart metre implementation program by The Department of Energy and Climate Change (DECC) of UK.

The Spanish telecom giant has been selected by DECC to provide communication services in the midlands, East Anglia, Wales and Southern England. The 15-year contract is worth $1.5 billion. However, the company is currently negotiating with DECC over the next step and will provide further information on the contract in due course of time.

The smart metres will let households in UK to control their electricity and gas usage, thus enabling the customers to reduce energy bills. Additionally, the new smart metres tariffs will provide customers with cheaper electricity at times of low demands. The nationwide project is expected to install 53 million smart metres by 2020, which will provide real time information to the consumers about the amount they are spending on energy at a particular time.

Telefonica will act as a communication service provider to send the metre reading to the energy suppliers and data communication firms via its cellular network in the UK. Its network will be supported by the use of mesh technology to connect smart metres in areas with lack of network coverage.

The other companies who were pursuing for the contract include the consortium of Vodafone Group Plc. (VOD - Analyst Report) and Silver Spring Networks Inc. (SSNI - Snapshot Report). Telefonica also competed with another group consisting of Arqiva, BAE Systems Detica and BT Group Plc. (BT - Snapshot Report), who have won the smart meter contract in the northern region of UK.

We believe that the contract will be a long-term revenue contributor to O2 in the UK, where the company struggles over low mobile tariffs and stiff competition. Furthermore, wining the contract ahead of rival Vodafone is a significant milestone for Telefonica in the UK.

Telefonica currently carries a Zacks Rank #3 (Hold).

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