Moody’s Predicts Virgin Media and Vodafone UK Asset Swap is Still Possible

The on-off possibility of an asset swap between cable operator Virgin Media and Vodafone in the United Kingdom has once again been reignited after the Moody’s Investors Service, which provides credit ratings and risk analysis to the market, predicted that the two “could eventually agree” on a deal.

On the surface such a deal has always seemed to make sense. Vodafone is strong in Mobile but their penetration into the fixed line market is still dependent upon Openreach’s (BT) existing FTTC / ADSL infrastructure, while Virgin Media (Liberty Global) is spending £3bn to extend their ultrafast cable (DOCSIS / FTTP) broadband and TV network to 60-65% of UK premises but their Mobile (4G MVNO) platform is dependent upon arch rival EE (BT).

Talks over the possibility of a mega merger or partial asset swap were first confirmed in June 2015 (here), although such a large deal would have created many complicated financial (Vodafone’s tax situation is tedious) and regulatory problems. In the end no deal could be reached but both sides left the door open to future discussions (here).

Since then Virgin Media has signed a new MVNO deal with EE for their Mobile platform and Vodafone has shelved plans for their own Pay TV (IPTV) service. On top of that Ofcom’s Strategic Review has forced various changes upon BT and Openreach are now pondering a much wider-scale deployment of “full fibre” (FTTP/H) broadband across the United Kingdom (here). Not forgetting the added complexity of Brexit.

We suspect that Vodafone would be keen to see how some of these changes impact their market before making any solid decisions. Nevertheless Moody’s expects to see further convergence, with the usual suspects all being named.

Gunjan Dixit, Moody’s VP and Senior Credit Officer, said:

“Many UK fixed-line operators have ventured into convergence through collaboration rather than M&A, but some could soon follow in the footsteps of BT’s acquisition of Everything Everywhere in 2016 and seek opportunities for consolidation.

Vodafone Group Plc (Baa1 stable) and Virgin’s parent Liberty Global plc (Ba3 stable) could eventually agree on an asset swap involving their UK and German businesses or even a full consolidation of their European operations. Telefonica S.A. (Baa3 stable) may conduct an IPO of O2 but it could sell the UK unit instead.

…

In a maturing broadband and TV market, it will become harder for companies to raise prices and grow their net customer base without further strengthening their suite of differentiated bundled offerings and their marketing efforts. This challenge is starting to feed through to weaker operating results for key players, such as Virgin Media Inc. (Ba3 stable), British Telecommunications Plc (Baa1 negative), Sky plc (Baa2 developing) and TalkTalk (unrated).”

As Vodafone’s CEO, Vittorio Colao, said earlier this year, “It is still an attractive combination. The deal is not on the table. But … it’s an interesting project. If Europe wants the creation of real alternatives to incumbents [like BT, then] Vodafone and Liberty are the only two guys in town.”

In fairness a mix of Virgin Media and O2 could also work, but Vodafone has already done a merger with Liberty Global (Ziggo) in the Netherlands and that makes something similar in the UK seem viable. However, aside from the periodic rumours of secret talks, we’ve yet to hear of any official discussions or agreements.

So for now it’s all a just few puffs of smoke, but no fire.