O2 and Virgin Media, respectively the UK’s largest mobile operator and cable broadband network, are reportedly in the early stages of exploring a merger. The prospect is thought to appeal to both sides by creating a combined entity that would offer real competition to BT. Together, O2 and Virgin Media account for over £11 billion in annual revenues and would represent a formidable business in the fixed-line and mobile sector.
O2-owner Telefonica, the Spanish telecoms giant, confirmed talks in a disclosure statement provided to the Madrid stock exchange. The exchange was informed of “negotiation phase” talks. Those were carefully qualified as, at this point, entailing “no guarantee, at this point, of its precise terms or its probability of success”.
Industry analysts believe the most likely structure any deal would take would be as a structured join venture between O2 owner Telefonica and Liberty Global, the Nasdaq-listed company that owns Virgin Media. Liberty Global would be expected to have to sweeten any deal with the addition of several billion bounds to compensate for Virgin Media’s lower value compared to O2.
BT is currently the dominant force in fixed line services in the UK. The former state-owned telecoms monopoly strengthened its position in the mobile space with the £12.5 billion acquisition of EE in 2015. At the time it had chosen not to pursue a takeover of O2 – the company originally created through a 2001 demerger from BT before being sold in 2005.
O2 has 34.5 million customers, including those of the Tesco Mobile and GiffGaff brands, and brought in revenues of €7 billion in 2019. Virgin Media would bring 5.6 million cable subscribers and 3.3 million mobile customers to the party.
A combined entity would have the clout to shake up the Europe-wide telecoms sector. Counterbids for one or the other company could be made and other deals tied up between companies who feel the need to react to remain competitive. Vodafone has been credited with a long-standing interest in Virgin Media with Sky also linked with O2 before being acquired by Comcast.
Telefonica has owned O2 since acquiring it from BT for £18 billion in 2005. However, the Madrid-based operator, which has businesses across Europe and South America, has seen O2 as a sellable asset for a few years now. The company wants to reduce its debts and had previously agreed to sell O2 to Three network owner CK Hutchison Holdings, the Hong Kong conglomerate. However, the £10 billion deal was blocked by the European competition regulator. A stock market listing was also looked at closed before the Brexit vote scuppered that idea.
The requirement to invest huge sums in 5G and fibre networks is placing telecoms companies under pressure and favouring scale. Those headwinds could see more dealmaking and mergers across Europe in coming years. Analysts have put potential cost savings and other benefits from an O2 and Virgin Media combination at worth up to £500 million.
Market clearly see some potential in the deal with Telefonica’s share price up 3.4% yesterday in Spain. BT started the day down but eventually recovered to gain almost 1%.