Virgin Media, O2 to merge U.K. businesses in $38.55B joint venture

The deal will bring stiffer competition to the U.K. mobile market where the three top providers are BT's EE brand, Telefonica's O2 and Vodafone U.K. (Getty Images)

Liberty Global and Telefonica have struck a $38.55 billion joint venture agreement to become a major fixed broadband/mobile provider in the United Kingdom. The 50-50 joint venture brings together Liberty Global’s Virgin Media broadband network and Telefonica’s O2 mobile platform in the U.K.

The deal values O2 at $15.59 billion and Virgin Media at $22.96 billion. Both parties expect to receive net cash proceeds at closing following a series of recapitalizations to take on debt as well as an equalization payment to Telefonica.

The transaction is expected to close in mid-2021 and is subject to regulatory approvals. The combination of Virgin Media and O2 will create a nationwide integrated communications provider with over 46 million video, broadband and mobile subscribers and $13.51 billion of annual revenue. The parties say they will invest $12.28 billion in the U.K. over the next five years.

Telefonica CEO Jose Maria Alvarez-Pallete said in a statement, “Combining O2’s 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.”

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Liberty Global CEO Mike Fries said, “When the power of 5G meets 1 gig broadband, U.K. consumers and businesses will never look back.”

NewStreet analysts James Ratzer and Soomit Datta noted last week that the UK is one of the most fragmented telecom markets in Europe, and Virgin Media remains a stand-alone cable operator without a wireless offering. “The cost synergies from putting together cable and mobile are reasonably clear,” wrote the analysts, and hence the opportunity for value creation through the combination of Virgin Media and O2 UK “is a pretty compelling one.”

Liberty and Telefonica predict an annual run-rate of about $531 million of which about 80% will be achieved by the third full year after the closing. Expected cost and Capex synergies include sharing of network infrastructures and IT systems; marketing cost reductions; and site rationalization. To achieve these synergies, the JV expects to incur about $866 million of integration costs.

In addition, when the joint venture is in place, Virgin Media’s mobile virtual network operator (MVNO) customers will move from BT’s network to the Virgin Media/O2 combined mobile network.

Executive leadership of the joint venture has not been announced. But the JV’s board will consist of eight members, four from Liberty Global and four from Telefonica. Fries and Alvarez-Pallette will sit on the board.

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The deal will bring stiffer competition to the U.K. market. Currently, BT is the only operator that offers the full package of fixed, mobile and video to U.K. subscribers. BT offers mobile through its EE brand. Vodafone U.K. is the third largest mobile provider, after O2 and EE.