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O2 Officially Confirms Merger Talks with UK ISP Virgin Media

Monday, May 4th, 2020 (9:41 am) - Score 8,730
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The parent of mobile operator O2 UK, Telefonica, has this morning confirmed last week’s speculation – via a brief filing to Spain’s market regulator – that they’ve officially opened merger talks with the parent (Liberty Global) of UK cable broadband ISP and TV operator Virgin Media. But no deal has been agreed and the talks could still fail.

The two paragraph long statement merely confirms that the “negotiation phase” has started and there is “no guarantee, at this point, of its precise terms or its probability of success,” although the operator has promised to keep markets informed if a “satisfactory agreement” can be done.

In the past we’ve seen similar talks between Vodafone and Virgin Media’s parent (here and here), but nothing ever came of those. On the other hand a deal with the behemoth that is Vodafone would be a more complicated proposition, while a deal for O2 might be smoother.

Nevertheless Telefonica have also been linked with similar discussions in the past, which never amounted to anything, but perhaps this time will be different.

TELEFÓNICA, S.A. (“Telefónica”) in compliance with the Securities Market legislation, hereby communicates the following:

INSIDE INFORMATION

In relation to the news published in some media regarding the discussions with Liberty Global on a potential integration of their respective telecommunications businesses in the United Kingdom, Telefónica informs that the process initiated by both parties is in a negotiation phase, not being able to guarantee, to this date, neither the precise terms nor the probability of its success.

In the event of a satisfactory agreement on this potential transaction, Telefónica will communicate such information to the markets.

Madrid, 4 May 2020.

SPANISH NATIONAL SECURITIES MARKET COMMISSION

As we’ve said before, a deal between Virgin Media’s fixed line broadband network and a dedicated mobile operator, such as O2, makes a lot of sense on the convergence front. O2 would gain plenty of access to feed their existing 4G and future 5G mobile network with data capacity from fixed lines, while VM could take on BT (EE) and perhaps develop a seamless all-IP network of its own (between fixed and mobile) with competitive bundles.

The exact structure of any deal is open the speculation, although assuming the agreement doesn’t eventually coalesce around a single brand (e.g. BT and EE retained their brands) then we could eventually see O2 re-entering the UK fixed broadband market (after selling their old fixed base to Sky some years ago) via Virgin Media’s platform (or Liberty Networks if they proceed with a proposal to split off their fibre into a separate wholesale company).

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).

Under that deal Virgin Mobile will start to transition on to Vodafone’s network from the end of 2021 (here), but it’s not too late to change that (provided a merger agreement can be reached soon), although there may be a cost to exiting the contract.

The other issue is that such a deal may result in O2 losing some of their MVNO customers, such as Sky Broadband (Sky Mobile), which may seek to work with Three UK or Vodafone instead. But that might become less contentious if Sky UK also reaches a long rumoured agreement to take a wholesale broadband solution from Virgin Media (most likely as part of a Liberty Networks split).

Telefonica has of course been looking to float or sell O2 UK in order to reduce their debt, although in the past year they appeared to have given up on that course and were instead focusing upon a plan to improve their UK network. In any case we can’t see any major regulatory obstacles to a deal with the cable giant, unlike O2 and Three UK’s failed attempt to merge a few years ago (blocked by the EU and Ofcom over competition concerns).

One other thing worth mentioning here is Ofcom’s forthcoming auction of 5G spectrum, which could have a significant impact on O2’s value. In the past Telefonica has suggested that any Initial Public Offering (IPO) might have to wait until that completes, although O2 itself has just threatened a legal challenge that may complicate matters (here).

Any merger would naturally leave Vodafone and Three UK as the only two mobile operators without their own fixed line base, although Vodafone has forged close wholesale ties with both Openreach (BT) and Cityfibre for fibre products. Some have however speculated that the talks with O2 may just be a ploy by Liberty Global to sniff out a better deal with Vodafone, but a deal could work with either operator.

UPDATE 1:38pm

Some readers have asked if we can paste in the full market statement from Telefonica, which I’ve done above. We also contacted Virgin Media about this and were given a “no comment” response, which is interesting because we’d normally expect both sides to make such a confirmation.

Leave a Comment
33 Responses
  1. Avatar Archie says:

    Nope. Definitely don’t do it. Awful idea. O2 will drag down VM even further.

    1. Avatar Archie says:

      @mark why is it a positive thing?

    2. Avatar Stephen Wakeman says:

      You posited a statement which was that it would be a bad thing. You were then asked why. You can’t respond to that question with a question.

      Mark has been neutral and hasn’t suggested positive or negative, electing instead to report objectively the facts as they are known.

  2. Avatar Dean says:

    Mergers that create behemoths should have better due diligence by regulators. BT/EE merger should always have come at a price to both companies, such as minimum commitment to improve Network masts, FTTH deployment commitments or even customer service response times.

    Anything that even marginally enhances user experience.

    I guess the question that probably never gets asked is, what does the consumer get out of this?

    In short there is clearly a financial incentive to both companies to have a merger, might as well squeeze out some good investment commitments for the user. Wont happen!

    1. Avatar joe says:

      “such as minimum commitment to improve Network masts, FTTH deployment commitments or even customer service response times. ”

      They already have that commercially or from ofcom.

    2. Avatar A_Builder says:

      @Joe

      Quite

      There are oceans of commercial cash flowing at FTTP. Build is limited by non financial resources, mainly. Most operators would go faster if they could.

      Only thing HMG needs to do ATM is to keep demolishing barriers so the rollout can reach more people.

    3. Avatar James Band says:

      Dean I concur.

      In theory, such mergers or partnerships (such as BT and EE, Vodafone & CItyFibre, or this proposed O2 and VM) should create economies of scale and result in a better ability to improve infrastructure (which companies can then sell to make their profits). HOWEVER, it should indeed be regulated to ensure GENUINE COMPETITION and a level playing field thus resulting in GENUINE capitalism and not crony capitalism, or regional monopolies.

      Along with the band/regulation for a certain percentage of the mobile market not going to one company, there should be laws forcing much better minimum requirements for FTTP/FTTH rollout, speeds and indeed customer service.

      If you fine any of these companies £100,000 per customer for any call that takes more than 25 minutes to be answered, and £1,000,000 per “incident” where an ISP/provider has overcharged a customer and hasn’t refunded the money automatically (within 48 hours), then you will suddenly see them take customer service seriously.

      I am not sure overbuilding 3 different networks is the way to go. Electricity and water companies don’t each build separate lines into every property in the country. If Openreach was completely separate from anyone (forcibly split from BT under the same model that the United States split up “Standard Oil”), it could form a regulated private entity that controls the backbone and uses its economies of scale to uplift the whole network, selling it to ALL providers on an equal playing field. Whether Openreach chooses to self fund and execute improvements, or subcontract out that work to these “Altnets” is up to its independent board in that scenario. To account for investment by Altnets to build their networks, they can be given a proportionate share of the new Openreach national network (profit share to account for the percentage of the network they have built until now) OR choose to sell their own network independently as now.

    4. Avatar Dean says:

      I would not hold my breath on a regulator that let BT(already a big player at the time) acquire EE(biggest network at the time-formed by the merger of two large networks) without making BT cough up some markets in return.

      Why should VM (that is struggling to maintain any decent level of customer service during this pandemic, let alone when they are working full throttle) that has an MVNO hence a cellular offering be allowed to merge with O2, that already has its own MVNO’s and then some be allowed to go ahead without getting commitments from them or making them loose a chunk of the market, so that we have more players in the market.

      Sorry to rant but we are where we are in terms of being Fibre laggards due to a toothless regulator, broken framework and the general willingess to improve the end user experience.

      What has the EE/BT merger given to the end user? – Free BT sports for a few months on EE? really is that our yardstick?

    5. Avatar James Band says:

      Dean I concur that the yardstick, or benchmark is woeful.

      If we compare ourselves to Singapore (which sells 1GBps and 10Gbps Fibre) or nations like South Korea, Estonia, Lithuania, Portugal, we are far behind. The regulator should benchmark properly and do its job. There should also be GENUINE competition which is what makes capitalism work. Having what effectively amounts to monopolies is not capitalism, or a free market.

      Overbuilding fibre networks, saying that “x” has been done which is an improvement is not enough. If we want to genuinely catch up, then we should aspire for greater. Openreach must be totally separate from any ISP to avoid any potential conflict of interests.

      And mergers should be subject to conditions, or regulation. However the general consumer service regulation is very poor. Companies pay token fines which are hardly a deterrent. They should be fined something like £1 million per incident (per customer). That will put the fear of god into them and make the consumer king again.

      As for TV, there needs to be a serious rethink to regulate that market. Not sure if Vodafone would offer TV over the internet like in Ireland, or Sky (like they do in Italy). BT TV and Talktalk TV just seems to be Freeview which is free anyway, yet they charge for it?! The fact that Sky will eventually concede giving customers their service for 75% off (where they still make a profit) means they are taking people for a ride and laughing all the way to the bank.

      You’d have thought the 4G pricing would force FTTP pricing down as well.

    6. Avatar Stephen Wakeman says:

      @James Band

      What you’re proposing is preposterous. A £100,000 fine for a customer phone call that takes more than 25 mins to resolve wont drive more investment into customer services, it will only drive up prices. Same with the asinine concept of a £1Million fine for overcharging a customer. That’s even ignoring the fact that mistakes occur even with highest degree of responsible oversight and diligence. E.g. a network problem causes a loss of service for a bunch of customers who all then call in at once for support. Unless there is massive over provision of CS staff to account for any and all unexpected events, then the wait time might breach 25 mins.

      Huge over provisioning of CS staff is neither efficient nor economically viable. To have staff twiddling their thumbs doing nothing just in case in order to avoid a potential fine would be stupid and it would be the customer who pays that price. If you want a company that operates like that then be prepared to cough up circa 50 to 100 times what you pay now. That would be literally the only way it would be worth the financial risk to operate a business in a market system that what so draconian and which applied fines that were so disproportionate.

      Also, your idea would never work unless ALL businesses operated on what you are calling “genuine capitalism” and frankly, the world can’t work like that. I’m not one to defend capitalism as it is, which I think is thoroughly broken and has created and fosters the existence of an elite upper class. But at the same time, truly free markets do not work. They carry too much risk and it’s not the rich elite that would be paying the price when it went wrong – it would be the Everyman.

    7. Avatar Roger_Gooner says:

      @James Band
      “As for TV, there needs to be a serious rethink to regulate that market.”
      Linear TV is in decline, nobody thinks that Virgin Media, Sky and BT TV need regulation in the Pay TV market. And you actually think that BT TV and TalkTalk charge for Freeview? Hint: think about the premium content they deliver over their broadband.

      “You’d have thought the 4G pricing would force FTTP pricing down as well.”
      You should have thought the seriously inferior 4G service would have no effect on FTTP pricing.

    8. Avatar James Band says:

      Roger_Gooner, go and look at the BT TV offering. You pay £10 a month for a box which lets you watch Freeview channels that your television will already receive and display for FREE.

      4G in certain areas would drive people away from landline broadband (and potentially even the phone) thus the likes of BT (or whoever) would lose custom. You’d think they’d want to install FTTP (theoretically a more reliable connection on fibre) and steal those customers back.

      As for TV, I’m not talking about Netflix, Amazon Prime etc. I’m talking about regular TV. If BT were offering a satellite (Freesat) connection which might allow those whose Freeview signal goes haywire during atmospheric weather issues, then at least that’s something. Vodafone offer TV in Ireland over Fibre.

      Anyway, when Singapore offers 1Gbps broadband for around £20 a month, and Lithuania, Estonia, Portugal all outdo us on FTTP, it is pointless blindly defending our appalling position. I am not talking about the state seizing everything, but proper regulation and a regulator with the backbone to get things done. The regulator shouldn’t be in bed with those it is regulating nor should Openreach have any connection to ANY ISP as it represents a major conflict of interests. It just seems bizarre that we are building multiple Fibre networks to the same places and there are parts of the country have zero fibre. Just imagine if electricity was rolled out to UK properties like that by individual electricity companies building separate lines to the same property.

      The business opportunities and quality of life for every citizen would be vast if we got FTTP to every home. At least get the Fibre to the house, because then the “backhaul” can be improved without any need to interfere at properties. It shouldn’t be the case that people are thinking WHETHER to fit a house with fibre. If we deem electricity and water a right, then so should Fibre. For every house that has a copper line, it must be made mandatory to install fibre by law. That way, it has to be done anyway, and companies will work out a way to make money. If necessary use the same subsidy scheme used to fund wind farms which has resulted in a profitable UK wind industry.

    9. Avatar James Band says:

      @Stephen Wakeman

      Preposterous how? It is a DETERRENT to force companies to get their act together. Almost all these companies have become public enemy number 1 (led by BT, though others seem to almost want to take that crown for themselves) instead of serving customers. The double standard for instance of them just raising prices, or messing up billing and taking EONS to fix, whereas if a customer heaven forbid didn’t pay the bill on time, is unjustifiable. What is good for the goose, must be good for the gander!

      The point is not about hiring more customer service representatives (CS). It is about NOT MAKING ERRORS in the first place and honouring their obligation to rectify such things AUTOMATICALLY. In this age of automated systems and them having so many billing teams etc already, are you really of the opinion that it requires the customer to have to deliberately check each and every bill – often which BT/Vodafone/Sky/whoever have written in incomprehensible/unnecessarily complicated “code” to confuse the reader – to have to ring up and request a correction of the bill and get their own money back? There are multiple stories of people having to wait for HOURS on the phone just to get a correction of a bill. And the arrogance and incompetence of the CS staff at many of these companies (just look at their customer satisfaction ratings by independent ratings or news surveys) beggars belief. If the situation was the other way round, the customer would have their credit rating destroyed for a late bill.

      Think about the loss of productivity in the country when individuals have to waste time to ring up CS just to correct a bill. Think about how it is pretty immoral for elderly people to have to go through complex verbose bills and face this type of nonsense. Changing prices during a contract (i.e. changing the contract) is something that wouldn’t be acceptable at a company to company level. This is not capitalism, but crony capitalism and legalised robbery. And this supposed “investment” by train companies or telecoms companies (with the exception of perhaps the better regulated mobile market) has not resulted in the world number one train network (look at Japan with proper competitive privatisation) or other OECD Fibre networks (South Korea, Lithuania, Estonia, Singapore, Portugal all ahead of us).

      The wait time I mentioned was a number plucked out of the air, but a reasonable assumption could be made that no one has the time to sit around and wait for 20+ minutes to get answered and then waste yet more hours, days and weeks to rectify an issue that isn’t the customer’s fault.

      Recently there was talk here, or on the news of the regulator charging some firms like Vodafone and BT around £600,000 for not handling Text scams (which send automated texts to people subscribing them to a subscription they never knowingly signed up for) properly. Do you really think that customers shouldn’t be “opted in” to have to willingly subscribe to things versus automatically getting scammed? £600,000 is not enough to force billion pound companies to reset their morality and protect their customers. If the DETERRENT is millions they will stop this sort of nonsense with commonsensical policies which will not cost the amounts you’re talking about.

      No one is talking about seizing companies and adopting Marxism. This is simply about COMMON SENSE and the rule of law. Having more competent staff (some of the Live Chat people are next to useless) is the issue, not having more staff.

      A free market based on a level playing field (for all customers and companies) based on the rule of law and common sense should result in better prices, services and faster deployment of the future. Just benchmarking the UK to the 1970s is not going to prepare us for 10 years time!

  3. Avatar Tim says:

    I wonder if this spells disaster for rural 4/5G coverage. VM only care about covering the cities and will likely concentrate on coverage in VM network areas only.

    1. Mark Jackson Mark Jackson says:

      Operators are under an obligation, of sorts, via the Shared Rural Network plan to extend 4G to 95% geographic coverage by the end of 2025. This won’t change and in fairness, you could level the same sort of complaint against all existing mobile operators, as urban areas are always the primary focus.

    2. Avatar Mark says:

      Shared rural networks main problems will be planning objections,local objections, and suitable locations. Sounded good at the beginning, but some areas have been trying to get masts built for 20 years, and the above always stops them.

  4. Avatar Steve Dabbs says:

    Vodafone have a vast fixed line base across the UK (legacy Cable & Wireless, Energis, Your Comms and Thus to name a few as well as it’s own, ever expanding network) so it would leave Three UK on its own without a fixed line base.

    1. Avatar Stephen Wakeman says:

      Is leaving Three as the odd one out actually an issue though? Genuine question.

      Three’s marketing capitalises on there being no need for an old fashioned phone line. Their home broadband via 4G and 5G calls out fixed lines as “faff”. The tag line is, “No landline. No engineer. Forget fibre.” To me that doesn’t sound like the tones of a company that has future plans to invest in fixed line comms. Obviously there is a reliance on the fixed lines to their masts but the markets already have protections in place to ensure them equitable access to backhaul.

    2. Avatar Roger_Gooner says:

      Three is the smallest mobile operator. If the VM/O2 deals goes through it will also be the only one that’s purely a mobile operator whilst the others will not only be much bigger but will also be quad play (BT/EE, VM/O2) or triple play (Vodafone). In such a scenario Three could be looking quite vulnerable against the big boys.

  5. Avatar Scott says:

    Interesting. I had pegged Comcast as the most likely suitor, at least for the UK operations, following their purchase of Sky.

  6. Avatar Dean says:

    Get VM to commit to a legally binding FTTP build number in exchange for the merger.
    Get O2 to commit to a legally binding number to take 5G to hard to reach, last mile rural locations.

    Then they can merge 🙂

    Let the consumer win for once!

    1. Avatar Pezza says:

      Sorry, the only winners are shareholders. No one else I’m afraid.

  7. Avatar Michael V says:

    Telefonica has been wanting to sell off O2 for years. This is their chance. I think the O2 name would be dropped & V.M. would continue. I think VirginMobile could invest more into O2’s networks & improve them. [across 3G-HSPA, 4G-LTE & VoLTE & 5G-NR]
    Time for a mobile industry shake up!

  8. Avatar Pezza says:

    I see the only good thing that may possibly hopefully come out from this, is that Tesco Mobile ditch O2 and mice it’s services over to the EE network.. probably wishful thinking though. But this does sound like a disaster waiting to happen for the likes of Sky and Tesco..

    1. Avatar kevin88 says:

      I cannot see Tesco Mobile switching to another network as they are part owned by O2. I could see Sky maybe moving networks to EE or Vodafone to be honest.

    2. Avatar Pezza says:

      Who said Tesco Mobile are part owned by O2? Do you have proof?

    3. Avatar Michael V says:

      @Pezza Hi! Kevin is right. O2 own 50% of Tesco mobile. They could either but out O2’s half & move to use another Operators network or VM would take them on.

    4. Avatar Roger_Gooner says:

      Tesco Mobile is a 50:50 joint venture owned by Tesco and Telefónica, so any switch away from O2’s network would be a breakup of the JV. Also as O2 runs customer service and billing for Tesco Mobile then a replacement operator would mean a big transition of those systems.

  9. Avatar Michael V says:

    Sorry about the spelling mistake, Let’s try again…
    @Pezza Hi! Kevin is right. O2 own 50% of Tesco mobile. They could either buy out O2’s half & move to use another Operators network or VM would take them on.

  10. Avatar Rob says:

    If this goes through will it be a big blow to BT?

    1. Avatar James Band says:

      Anyone that manages to have more financial firepower to build networks, increase coverage, in theory would threaten BT. But it’s come to a state, where “the house always wins.”

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