O2 be a fly on the wall during BT and Vodafone’s video calls: Telefónica’s UK biz, Virgin Media officially merge

Multinationals’ UK arms pair up to take on Voda and former state-owned telco

Telcos Telefónica and Liberty Global today confirmed plans to join their O2 UK and Virgin Media subsidiaries into one combined entity in a deal analysts branded a “blockbuster merger”.

The combined provider will sell fixed-line, mobile, and paid television services, and would directly challenge the dominance of BT in the UK.

Telefónica confirmed the existence of ongoing merger talks earlier this week, but minimised them, saying the firms were still in the negotiation phase, and it was unable “to guarantee, to this date, neither the precise terms nor the probability of its success”.

The deal, which is expected to close in mid-2021 subject to regulatory approval, will create a combined entertainment and broadband provider in the UK, with 46 million subscribers and annual revenue of £11bn.

The bulk of these subscribers belong to O2, which has 34 million subscribers across the UK, and serves as the backbone for several MVNO mobile providers, including Giffgaff (which is owned by the same parent company), LycaMobile, and Tesco Mobile.

Meanwhile, Virgin Media boasts 14.6 million subscribers in the UK and Ireland markets across its broadband, fixed-line, and television products. It also has a further 3.3 million mobile customers, via its Virgin Mobile brand.

Unlike O2, which operates its own infrastructure, Virgin Mobile sits as an MVNO on the EE network, acquired by BT back in 2014.

According to the parent companies, both firms intend to invest a collective £10bn in the coming five years, primarily centred on the nationwide provision of 5G and gigabit “full-fibre” broadband.

Equity in the joint venture will be split 50-50 between Liberty Global and Telefónica. Although Virgin Media is technically valued higher than O2 (£18.7bn versus £12.7bn), O2 boasts bigger annual revenues (£6.2bn versus £4.7bn). Furthermore, equity in O2 will be transferred to the joint venture on a debt-free basis, while Virgin Media brings with it £11.3bn in debt and “debt-like items”.

Kester Mann, director of consumer and connectivity at analyst house CCS Insight, described the deal as a “blockbuster merger” that promises to transform the UK telecoms landscape.

“Each side gains crucial assets it severely lacks: a mobile network for Virgin and a fixed-line arm for O2,” commented Mann, who added the deal is unlikely to be thwarted by regulators, due to the differing nature of both companies.

That’s significant as a previous acquisition attempt on O2 from Three parent Hutchison Whampoa was halted by the European Commission over concerns it would adversely limit competition in the mobile telecoms market.

Mann expects this deal will have onward consequences in the wider market. “Vodafone, Three, Sky and TalkTalk will all be assessing their positions and further deal-making can’t be ruled out,” he said.

“Vodafone UK appears the biggest loser as the deal lays bare its weak position in the market for converged services. It also looks certain to scupper its virtual network partnership struck with Virgin Media in 2019.”

It’s not immediately obvious what will happen to the O2 and Virgin Media brands.

Analysts at Megabuyte said the deal “makes clear sense… combining significant fixed-line and mobile networks with, we assume, no significant regulatory hurdles given that BT’s EE acquisition in 2016 was basically waved through.”

It also commented that the “main loser” in the merger would be Vodafone: “With the deal creating a player that would vie for top position with BT in the UK comms and pay TV market on various metrics, as we noted earlier this week, the main loser from the proposed merger would appear to be Vodafone, which is now a distant fourth in the comms+pay TV market.”

News of the deal comes after Telefónica released its Q1 results [PDF] for the period ending 31 March 2020. Net profit plunged 56.2 per cent to €406m from €926m in the same period last year, prompting the firm to withdraw its 2020 financial guidance. ®

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