Liberty Global and Telefonica have reached an agreement for merging their UK businesses. Liberty Global-owned Virgin Media UK provides broadband services while Telefonica owns the mobile carrier O2.
This new deal would be in the form of a 50-50 venture and not a formal merger. As per this deal, Virgin media which is valued at £18.7 billion and O2 with a value of £12.7 billion would be transferred into a joint venture. Virgin Media would contribute £11.3 billion which includes debt and debt-like items, while O2 would be transferred on a debt-free basis. The new combined entity, planning to retain both the brands, has planned to invest over £10 billion in the UK for over 5 years.
Once combined, the integrated service provider would have more than 46 million mobile, broadband, and video subscribers in the UK. Its combined revenue is estimated to be close to £11 billion. Both the firms would also get significant cash proceeds after the closing of this deal. Telefonica is slated to receive £5.7 billion proceeds. Liberty Global, after paying Telefonica a £2.5 billion equalisation payment, would get £1.4 billion.
While the deal has shaken the country’s telecom sector, another interesting aspect of it was that both sides entered the agreement without waiting for the results of the 5G spectrum auction by Ofcom. This auction has the potential to impact O2’s valuation and has also recently threatened for legal action that could make things more complex.
After this deal, Three UK is the only mobile operator in the UK’s market that does not have a presence in the fixed-line segment. From its acquisition of Cable & Wireless, Vodafone already has a fibre network presence. However, for broadband products, Vodafone is still dependent on wholesale products from Cityfibre and Openreach. There were rumours of merger talks between Vodafone and Virgin Media, but nothing conclusive was ever announced.
As per Jose Alvarez-Pallette, who is Telefonica’s CEO, this merger of Virgin Media’s superfast network with O2’s mobile business would be a game-changer, which comes at a time when the need for connectivity has never been greater or more critical. Liberty Global’s CEO Mike Fries also released a statement expressing their excitement about the merger. He talked about how Virgin media had revolutionised entertainment and broadband with its innovative video platform and fast internet, while O2 was the most trusted mobile service provider in the UK. He termed this as the ‘future of convergence’, stating that as 1-gig broadband meets the power of 5G, businesses would never look back.
The transaction is expected to complete between May and July of 2021 if there are no concerns from regulators. Since both the firms operate in different segments- mobile versus fixed, regulator concerns are not expected. However, the large time gap also gives Vodafone enough time to think about going into a bidding war- something that was already seen in 2019 with KCOM.
Virgin Media is currently in the middle of its 5-year contract with Vodafone. As per this contract, Vodafone would take over the MVNO or Mobile Virtual Network Operator platform from British Telecom. That is scheduled to start after 2021, so the damage from this merger should not be mitigated.
What also remains to be seen is the impact this could have on the MVNO agreements that O2 already has in place with Sky Mobile, Giffgaff and Tesco Mobile. Not much disruption is expected at this end since the operators are expected to keep the MVNO services maintained.
A sum of £700 million would be spent across a period of 4 years for this integration. O2 customers are not likely to see any change, while Virgin Mobile customers are left wondering. As Virgin Media’s 5G MVNO deal with Vodafone ends in 2021, so will the expectation of 5G. What Vodafone will ask for that, and how this deal will change the future of the telecoms industry in the UK will be interesting to watch.