The move will make Huutchison Whampoa the largest mobile operator in the UK, with almost 33 million customers and "significant synergy potential", the company said in a statement.
"This combination will provide our business with the scale and financial strength necessary to be an even more effective and aggressive competitor in the rapidly evolving UK telecommunications sector," Hutchison Whampoa said.
Hong Kong-based telecommunications expert Paul Haswell of Pinsent Masons, the law firm behind Out-Law.com, said that the deal is of particular significance to Hong Kong.
"It is seen as evidence of Hong Kong tycoon Li Ka-Shing, the owner of Hutchison Whampoa, seeking to diversify his business assets away from Hong Kong and Asia. However, in business terms, the acquisition makes perfect sense for Hutchison," Haswell said. "The company is synonymous with telecommunications in the Hong Kong market but only played a limited role in the UK through its ownership of Three. With the acquisition of O2 it becomes arguably the most important player in the UK’s extremely competitive mobile telecommunications market."
Chief executive of Three, David Dyson, said that Three's strength in mobile data would combine with O2's network coverage to bring benefits to consumers and businesses, and be "well placed to satisfy rapidly growing demand".
Canning Fok, managing director of Hutchison Whampoa described the agreement with Telefónica as a "major milestone".
"The combination of Three UK and O2 UK will create a business with unmatched scale and strength that will allow us to better compete against other operators in the marketplace, and also enable us to provide even better service and innovation to UK customers, in a market that will remain fully competitive," Fok said.
The merger remains subject to approval by EU competition regulators.
In March, the UE's new anti-trust head Margrethe Vestager commented on European telecoms mergers, and said that they must not lead to a rise in prices for consumers.
"I have one interest and that is to make sure that European consumers —citizens or businesses — can enjoy relatively innovative markets at affordable prices," she told the Financial Times.
Past consolidation has not led to improved infrastructure, Vestager said. In fact, she told the Financial Times, "I have seen a number of examples of the opposite. So far it seems as if it is still competition that will lead to investment and not the other way round."