Virgin Media and O2 Agree UK Broadband and Mobile Merger

Cable broadband ISP Virgin Media (Liberty Global) and mobile operator O2 (Telefonica) have this morning confirmed that they’ve reached a complementary 50-50 joint venture deal to merge their respective fixed line broadband and mobile network businesses in the United Kingdom. But Vodafone could still crash the party.

The deal, which values O2 at £12.7bn and Virgin Media at £18.7bn (total enterprise value), will see O2 being transferred into the Joint Venture on a debt-free basis, while Virgin Media will be contributed with £11.3bn of net debt and debt-like items. The combined company, which looks set to retain both brands, intends to “invest £10bn into the UK over the next 5 years” (this no doubt includes a lot of existing upkeep costs).

As part of this agreement both parties expect to receive net cash proceeds at closing following a series of recapitalizations that will generate £5.7bn in proceeds for Telefonica and £1.4bn for Liberty Global (after an “equalization payment” to Telefonica of £2.5bn). The new JV business is also hoping to deliver “substantial synergies” of £6.2bn after integration costs, and equivalent to cost, capex and revenue benefits of £540m on an annual basis by the fifth full year post-closing.

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Assuming all goes to plan and the regulators don’t raise any big concerns (not expected since both businesses are focused on different markets – fixed vs mobile) then the transaction would complete by around the middle of 2021. However that also gives Vodafone plenty of time to consider whether or not to start a bidding war, much like we saw with KCOM last year.NOTE: VM and O2 combined will create an integrated UK provider with over 46 million video, broadband and mobile subscribers and £11bn of revenue.

Mike Fries, CEO of Liberty Global, said:

“We couldn’t be more excited about this combination. Virgin Media has redefined broadband and entertainment in the U.K. with lightning fast speeds and the most innovative video platform. And O2 is widely recognized as the most reliable and admired mobile operator in the U.K., always putting the customer first. With Virgin Media and O2 together, the future of convergence is here today.

We’ve seen the benefit of FMC first-hand in Belgium and the Netherlands. When the power of 5G meets 1 gig broadband, U.K. consumers and businesses will never look back. We’re committed to this market and are right behind the Government’s digital and connectivity goals.”

Jose Maria Alvarez-Pallete, Telefonica CEO, said:

“Combining O2’s number one mobile business with Virgin Media’s superfast broadband network and entertainment services will be a game-changer in the U.K., at a time when demand for connectivity has never been greater or more critical.

We are creating a strong competitor with significant scale and financial strength to invest in UK digital infrastructure and give millions of consumer, business and public sector customers more choice and value. This is a proud and exciting moment for our organisations, as we create a leading integrated communications provider in the U.K.”

The move will enable O2’s mobile network to benefit from capacity from Virgin Media’s national fibre optic network, which will be vital as they roll-out ultrafast 5G (mobile broadband) infrastructure across the country. On top of that the mobile operator will be able to launch broadband products of its own, albeit using VM’s network (they sold their old fixed line base to Sky some years ago and until now have remained mobile-only).

On the flip side Virgin Media will gain full access to a mobile network of its own, which should complement their existing products and enable them to compete more directly with BT (EE), as well as to potentially build their own style of seamless all-IP fixed and mobile converged platform.

The deal leaves Three UK as the market’s only mobile operator without any fixed line base of its own. Meanwhile Vodafone has a limited fibre network from the Cable & Wireless acquisition, but when it comes to consumer broadband products then they generally still take wholesale solutions from Openreach (BT) and Cityfibre. Vodafone has long been linked to merger talks with Virgin Media, but nothing has ever come of that.

However, one of several potential problems here could be the fact that Virgin Media has already signed a 5-year contract with Vodafone, which will see the latter taking over their Mobile Virtual Network Operator (MVNO) platform from EE (BT). But that won’t begin until the end of 2021 (here) and so the damage from today’s deal should be manageable.

Meanwhile it remains to be seen how this could impact O2’s existing MVNO arrangements with operators like Tesco Mobile, giffgaff and Sky Mobile (Sky Broadband). We suspect that it won’t cause too much disruption as they’re required to maintain MVNO services, although Sky (Comcast) may feel uncomfortable due to not owning their own mobile network (i.e. Three UK and Vodafone could become targets).

On the other hand Sky’s fixed base is still dependent upon Openreach’s network, although they have repeatedly been linked to a potential wholesale ISP agreement with Virgin Media (or Liberty Networks if VM’s network is split off later this year).

The deal is certainly an interesting one and seems likely to shake up the UK telecoms market, although it’s interesting to note that both sides chose to reach an agreement now rather than await the outcome of Ofcom’s next 5G spectrum auction. The auction could have a significant impact on O2’s value and they recently threatened a legal challenge that may complicate matters (here).

Separately it’s worth noting that Virgin Media’s broadband network suffered another couple of significant outages last night, between around 1am and then 1:40am, as well as a smaller incident around 6am. The issues were similar to the problems they suffered only a week or so ago.

Source: ISP Review

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