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Virgin Media and O2 Agree UK Broadband and Mobile Merger

Thursday, May 7th, 2020 (6:40 am) - Score 17,095
virgin_media_o2_uk_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.

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.

Merger Agreement Doc (PDF)
https://www.nationalconnectivitychampion.co.uk/Liberty-Global-and-Telefonica-UK.pdf

Leave a Comment
45 Responses
  1. Avatar Herve Shango says:

    I must admit Liberty (VM) went in on this one knowing they will take over O2 (no doubt). Vodafone is finished at this rate.

    1. Avatar Mike says:

      What makes you think Vodafone is finished?

    2. Avatar Samuel says:

      I very much doubt Vodafone is finished. They are still the best network in the capital – and the only ones capable of delivering usable speeds in Victoria station.

    3. Avatar Sharon White says:

      Comcast could buy Vodafone to merge with Sky.

    4. Avatar Steven says:

      Vodafone is the worlds largest mobile operator – I’m sure they’re far from done.

    5. Avatar Ferrocene Cloud says:

      Sharon, Vodafone are too large for Comcast to easily buy outright without getting their hands on an awful lot of capital. And I can’t see Vodafone selling off VF UK as their home market and international base of operations.

      LG have been more than willing to sell of VM for the right deal, this isn’t the case with VF UK.

    6. Avatar Yatta says:

      @Steven: Vodafone hasn’t been the “worlds largest mobile operator” for a long time by any metric, it’s about 12th now by subscribers, China Mobile has approx 5x as many mobile subscribers.

      I agree that they’re far from done, but they are certainly in fairly serious decline.

      @Ferrocene Cloud: Comcast wouldn’t need to purchase the whole of Vodafone Group (and all its subsidiaries) to acquire Vodafone’s UK operations, it’s likely well within their means / borrowing ability.

    7. Avatar Ferrocene Cloud says:

      Yatta,

      They would have to buy the entire Vodafone Group because Vodafone won’t want to sell VF UK. Why would they? It’s their home market as a UK-based company, and has their international head offices.

      You can only buy what someone is willing to sell.

    8. Avatar Yatta says:

      @Ferrocene Cloud: Vodafone Group is a business, notions of “home market” are irrelevant, if it’s in Vodafone Group and its shareholders (or creditors, if its decline continues) interests to offload any aspect of its operations, including its UK operations, it’s able to do so (subject to regulatory approval).

      Being UK based and headquartered are also entirely irrelevant, if Vodafone Group were to offload its UK operations, that in itself would have no intrinsic bearing on the former.

    9. Avatar Ferrocene Cloud says:

      Yatta, companies don’t just throw away their home market. Despite what you say, it is a thing, and a key part of the identity of a company, Vodafone being a strong British brand. It’s also one of their biggest local markets, and shareholders don’t tend to think too highly of getting rid of your strongest areas and keeping the weaker markets, so that argument falls flat on its face.

      There’s no need to sell. There’s no desire to sell. Unlike LG who have been looking to sell off their local markets for years to raise funds.

      The mistake you make is thinking Comcast can just snap their fingers and get what they want if they hypothetically bid, which is not the case. When you consider that LG who have been looking to sell VM for a while have had offers break down, to think someone else can easily buy what isn’t for sale is a bit odd.

      Now if Comcast pay stupid money, sure, but the figure they’d have to pay is likely so high that they’d probably be better off taking over Vodafone Group. And of course if they’re forced to overpay they have to answer to their shareholders as well, and they’ve got the challenges of raising the funds.

  2. Avatar mike says:

    “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.”

    No it didn’t. Any outages you may be referring to must be localised as I have continuous monitoring of my connection and there were no issues overnight.

    1. Avatar James says:

      Must have been a select few then as I can report of a dropped connection during that time.
      Also a friend if mine in an other region also reported.

    2. Avatar Chris says:

      Yeah, my connection was down at the times stated.

    3. Avatar Connor says:

      My connection also experienced issues at the times yet my monitoring didn’t show any drops.

      Like the last outages I had odd routing issues to certain websites like GitHub.

    4. Avatar Mike says:

      Isn’t VM’s network still quite fractured along the old cable network territorial lines?

    5. Avatar Matt says:

      What is classed as a major outage????

      Also 1-2am in the morning, and 6am, surely they have to do changes on the networks at some point, when do you want them done?

  3. Avatar Another Chris says:

    Was your connection definitely down, or just showing as down on ThinkBroadband ping graph? My TBB graph shows disconnections at those times but the connection was online with no downtime all night. It looks like a fault somewhere between TBB and Virgin.

    1. Avatar Chris says:

      Good question… I just checked some other logs and they don’t show any connection problems. So it would seem there was a problem between TBB and Virgin.

    2. Avatar Chris says:

      Interesting. Thanks, Andrew.

  4. Avatar Matthew says:

    I think Vodafone will be gutted this deal has come together quite quickly since the rumours surfaced last week. This really does leave them as minority player in there home market.

    1. Avatar Sharon White says:

      Comcast could buy Vodafone to merge with Sky.

    2. Avatar Name says:

      Don’t be naive. O2 with VM will not invest more than necessary to keep business running. There will be no massive change in mobile network speed in O2 at all. They will stay in the bottom where they are for the long time now.

  5. Avatar Dave Payn says:

    Samuel – unfortunately (though I realise this may come as a shock) there is more to the UK than (a) Victoria Station and (b) London

    1. Avatar Declan M says:

      Totally Dave, I have recently shifted from Vodafone to EE (BT) and speeds are like night and day I live about 10 miles outside of Edinburgh (countryside) I can get 120mbps on 4G+ and it was 55 max with Vodafone 4G+. Am will be very surprised if Ofcom green light this merger.

  6. Avatar dean says:

    Watching the share price and rubbing my hands with glee LOL

  7. Avatar Ferrocene Cloud says:

    I would see this as a massive mistake on Vodafone’s part if they sit back and watch this happen without attempting to put a bid in for Virgin Media themselves, a VM-O2 competitor will be very strong as a quad-play offering. Even if there was a hypothetical VF merger with Sky, this would result in a relatively weak fixed line market share.

    The deal has come together very quickly so it will be interesting to see how other players react.

    1. Avatar Roger_Gooner says:

      Vodafone can gatecrash this agreement with a rival bid although with 17.2m mobile customers it has only half the number of O2’s mobile customer base. Bear in mind that a VM-O2 deal is only a deal once it’s been signed. I think that Vodafone would be forced to act as it has only about 600,000 fixed broadband customers (which is hard to grow organically) and has no Pay TV offering. Such a deal would obviate the awkwardness of VM getting out of its MVNO contract to switch to Vodafone.

    2. Avatar Ferrocene Cloud says:

      Not just that Roger but I’d expect there to be significant cost savings from Vodafone’s side as well. By taking on the Virgin Media network that means no longer paying VM for tail circuits and backhaul, and means cutting out Openreach circuits in a lot of cases if VM can provide them ‘for free’.

      All on top of massively growing the fixed line user base (slow to grow organically as you say) and expanding the network, and getting their hands on the TV market.

      I would be astounded if a bid is not being seriously considered, as this will significantly weaken Vodafone, while strengthening a key competitor.

    3. Avatar Chris says:

      @ Ferrocene Cloud

      Vodafone has its own national fibre network after it purchased C&W uk many years ago, with providing its own backhaul one of the drivers for the purchase so they didn’t have to pay BT.

      Virgin will do nothing for Vodafone, consumers are moving towards streaming and the internet access technology (Copper, fibre, coax, cell) is becoming less and less relevant, future 5g features will shift the market from consumers needing a home router to connecting your devices to your mobile airtime account. As VM don’t produce any of their own content they will struggle to monetise tv.

    4. Avatar Ferrocene Cloud says:

      Chris, there’s a huge amount of the UK not served by the C&W network and other networks Vodafone took on. They still lease a lot of fibre from Openreach and Virgin Media, and when the MVNO agreement was reached it was announced as part of it that a wholesale agreement between the two, so still a massive need for 3rd party fibre. Probably 95% of the Vodafone circuits I’ve seen during my time in the industry use OR/VM for the tail fibre alone.

      5G is expensive to deploy in part because you need smaller cells so that’s a lot of backhaul. Backhaul that will probably need leased fibre driving up ongoing cost.

      Generally speaking the advantages to Vodafone are the same as for O2.

    5. Avatar Roger_Gooner says:

      @Chris
      “Virgin will do nothing for Vodafone, consumers are moving towards streaming and the internet access technology (Copper, fibre, coax, cell) is becoming less and less relevant, future 5g features will shift the market from consumers needing a home router to connecting your devices to your mobile airtime account.”
      Millions are being spent by operators such as OR and VM to expand their FTTP networks to meet demand for fixed line broadband. Could it be that they know something you don’t?

  8. Avatar ... says:

    Three offer Unlimited Broadband for existing customers for as little as 61p a day or 79p for new customers, with no 1TB FUP or hidden caps. Who would honestly pay £40 monthly for a 24 month package with yourselves.

    1. Avatar Matt says:

      Errrm… what are you talking about….

  9. Avatar Hyperlord says:

    This is only a good thing as it opens up VM’s cable network to allow someone else to offer a package. About time too and allows O2 to use VM’s network for it’s mobile network.
    I’m with both VM and Giffgaff (O2) so it benefits me. Anything to allow access to VM’s cable network monopoly is a good thing.

    1. Avatar Matt says:

      Re-selling Virgin’s cable services isn’t something I beleive the big national ISP’s would be interested in, I don’t see any pro’s to it, would be basically selling Virgin’s service under another name which will probably be the case for O2.

      Only arrangment I could see is O2 and Virgin working out discounts for taking there services together, or something similar to how it was done when Be There Broadband was around and that was just re-branded router and O2 IP blocks from what I remeber being an O2 Broadband customer,

      Based on the fact that the kit Virgin supplies has interchangable branding (logos clip on and off) and the hubs also being available in White in other parts of world this would be a possibility.

  10. Avatar Jamie Simms says:

    It will be interesting to see if Vodafone do make any counter bids for Virgin Media as it’s not just the Virgin mobile deal that will be affected by the O2 offer.

    Vodafone and O2 tried to work together with the Cornerstone arrangement but that has not worked well hence why Vodafone are now building a whole new 5G network in Eastern UK towns and cities at a great expense and delayed rollout for at least 12 months . Back in March Vodafone also signed a deal with Virgin Media business to provide backhaul connections from 4&5G mast sites into Vodafone’s own Red stream core network, will they still want to do that if it becomes part of a major competitor that is part of the reason why Vodafone pushed to have Openreach separated from BT/EE

  11. Avatar Brian J says:

    Hyperlord states that Virgin would have to open there broadband structure up to anyone as Openreach already does .If this is true is it not a good thing for the consumer.

  12. Avatar Archie says:

    Thank God o2 palmed off their terrible DSL onto Sky.

    The real question here is… what’ll happen to Sean Bean?!?!

  13. Avatar please no says:

    News of O2s agreement with VM was dismaying. I have been with both for years, and often think of them each as two poles on a spectrum of moral behaviour in the marketplace. It will be a very sad day to see O2 climb down to the level at which virgin operates. The two poles of customer service and ethical documenting of process and outcome couldn’t be more contrasting. . There is precisely one person in Virgin to whom I turn – thank you Conan. O2 – I don’t change as I’ve trusted them. Couldn’t be more opposite with VM

    1. Avatar Tom says:

      I have to agree with this. I haven’t been with O2 for years as I personally think they’re too expensive for what they offer and haven’t had the investment to keep their network up to the standards of other operators. However they’ve always offered excellent service and it’s a shame because VM has been the polar opposite of that.

  14. Avatar Archie says:

    I feel for the staff who’re going to have to integrate the two…

    1. Avatar Ay says:

      I feel worse for the O2 staff who will see just how bad it is at VM

    2. Avatar Matt says:

      @Ay – You have an experiance you wish to share?

  15. Avatar walnut coffee table says:

    I do agree with all the ideas you’ve introduced on your post. They are really convincing and will certainly work.

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