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Liberty Global and Telefónica have struck a deal to combine their British operations O2 and Virgin Media in a $38B merger that will reshape the UK’s telecoms market. The two companies announced the deal after five months of negotiations.
Multinational telecommunications company Liberty Global Olc (NASDAQ: LBTYA) and Telefonica S.A. (BME: TEF) decided to combine their British operations in a deal that will constitute a new giant in the country’s telecommunications industry. Liberty Global’s cable operator Virgin Media, therefore, plans to consolidate with Telefonica’s mobile carrier O2 in a 50-50 joint venture between the two companies. The deal is valued at £31.4 billion ($38.9 billion), with O2 valued at £12.7 billion and Virgin Media worth £18.7 billion. The transaction is expected to be closed by mid-2021.
The combined company could put pressure on BT, which bought EE, Britain’s biggest mobile network operator, back in 2016, as well as its competitors, Vodafone and Comcast-owned Sky. BT CEO Philip Jansen said that the merger is a “sensible move” that “follows our strategy” of converging fixed and wireless broadband networks.
Commenting on the agreement, Virgin Media CEO Mike Fries shared his thrill by saying that his company “has redefined broadband and entertainment in the UK with lightning fast speeds and the most innovative video platform, while O2 is widely recognized as the most reliable and admired mobile operator in the UK.
Telefonica CEO Jose Maria Alvarez-Pallete stated the deal would be a “game-changer in the UK, at a time when demand for connectivity has never been greater or more critical.”
The truth is, the COVID-19 outbreak led to the demand growth regarding internet services as people across the UK have been under the lockdown measures.
Shares of Telefonica were down 2.13% at 1:55 pm CET%, while BT Group (LON: BT.A) stock slumped over 9%. BT reported on Thursday that its adjusted revenue stood at £22.82 billion, down 2% mainly reflecting the impact of regulation, declines in legacy products, strategic reductions in low margin business and divestments. The company stated that due to the uncertainty created by Covid-19 it will not provide a financial outlook statement for 2020/21 and has suspended its dividend until 2021/22, one of the biggest on the London stock exchange.
Deal Good for Both Virgin Media and O2
Kester Mann, an industry analyst at CCS Insight, said he thinks the deal was “a good one for both sides.”
“There’s a natural fit, they’re clearly gaining some of the assets they lack: mobile for Virgin, and fixed for O2. I think it does provide a strong competitor to BT and also Sky.”
He also warned the coronavirus pandemic could act as a double-edged sword for the new participant.
“On the one hand, telecom operators are going to emerge from coronavirus with a great amount of respect. The networks are generally performing very well and the value of connectivity has never been higher.”
More Investment Will Be Needed
Still, in spite of the growing demand for connectivity resulting from the UK’s lockdown restrictions, Mann noted this could “potentially necessitate more investment” to support the networks, adding that “there are some challenges there in how they monetize that.”
The combined group will have an overall 46 million video, broadband and mobile subscribers, as well as £11 billion in revenue, both firms confirmed. The deal will allow Virgin Media to beat O2′s experience in developing next-generation 5G mobile networks, which are expected to make important sales boost for telecommunications companies in the months to come.
O2 will be reassigned to the joint venture debt-free, both companies stated. Virgin Media comes with £11.3 billion of net debt and debt-like items. The newly-formed group will invest £10 billion into the UK market during the next five years.