A new report from market analysts at Bloomberg Intelligence (BI) has perhaps stated the obvious by concluding that the recent UK mega broadband and mobile merger between O2 and Virgin Media is “unlikely to trigger a chain reaction of mergers,” which is because there “simply aren’t many easy or credible deal options left.”
One thing that helped to fuel both of the recent mega mergers -particularly between BT and EE, and then O2 and Virgin Media – is that both sides had built their own independent mobile and fixed line networks. Suffice to say that such mergers can deliver a lot of flexibility in terms of converged products, cost efficiencies and network developments for consumers.
The catch is that there aren’t many options left at the top end of the UK telecoms market for big players to merge in the same way. BI believes that Vodafone and Sky (Sky Broadband, Mobile and TV) may consider combining to create a third infrastructure-based converged-player, but Vodafone’s enterprise-customer bias could be problematic, and Sky’s parent company, US-based Comcast, has more pressing domestic issues to tackle.
Instead, BI expects that Vodafone might therefore look again at the now privately-held TalkTalk to help boost scale in the broadband market and improve full-fibre economics. Except neither Sky Broadband, nor TalkTalk, have their own physical consumer fixed line infrastructure networks (i.e. they take wholesale services from Openreach, CityFibre and others etc.), but they do have large customer bases in broadband and TV.
Meanwhile, BI said that mobile carrier Three UK looks set to continue with its go-it-alone strategy, following the merger with its Irish sibling in early 2020. We think this might work out well for them on the Mobile Virtual Network Operator (MVNO) front, since there are fewer conflicts of interest for providers seeking to add mobile than with the bigger merged players.
However, BI states that a “midterm deal between Sky and VMO2 to create a communications behemoth can’t be ruled out,” although at this stage that looks a little unlikely. BI also “expects that interest in ITV is likely low, but it could still be a long term fit for BT or [VMO2],” but that’s a bit of a different market and lately BT has been trying to get out of the broadcasting side (here).
Matthew Bloxham, BI’s Senior Analyst for Technology, Media and Internet, said:
“Our analysis highlights that there aren’t many more UK telecom deals that make much strategic sense. Out of the deal possibilities we have identified, only a combination of Sky and Vodafone could rival the synergy opportunity created by the merger of Virgin Media and O2.
Cash-flow generation capacity is becoming more important as investment demands increase to build full-fibre and 5G networks. Acquiring TalkTalk may have given Vodafone better negotiating leverage with full-fibre infrastructure platforms such as Openreach and CityFibre, but the synergy prize would’ve been small. TalkTalk has already significantly cut operating costs.”
Mind you, it’s worth starting to consider the prospects for future mergers or take-overs in the mid-range of the market, such as between new network infrastructure players like CityFibre, and Sky Broadband, TalkTalk or even Hyperoptic etc. The sheer number of altnets in the fixed line full fibre game right now suggests that there will be a lot more consolidation to come further down the road.
The Sky/virgin merger keeps cropping up time and time again, I think there may be really something going on behind the scenes.
If analysts think a SKY VM/02 merger is a possibility, why is a SKY BT merger never floated? BT would be a much better fit with SKY, since SKY already uses the BT/Openreach network. Since SKY is content, and BT is Network, I would think the same competition issues would apply equally to SKY merging BT, or VM/O2, so either scenario could apply. You could argue that SKY and VM/O2 are direct competitors, since they compete directly for customers in the CATV Franchise areas, in BT’s case it’s the BT TV product that might raise competition concerns.
In truth I couldn’t see the CMA, and Ofcom agreeing to either scenario, as the smaller entities would argue that the merger would damage competition irreparably.
You may be forgetting that Sky is in reality the European arm of Comcast / NBC Universal, so is well capitalised. In terms of attractiveness to Comcast, I could see interest in either BT or possibly even Vodafone.
Unlikely for a while if at all. VM and O2 need to carry out their operational merger first.
Not sure VMO2 have much Sky won’t be able to get wholesale shortly. Sky have had plenty of opportunities to move into access network yet sold their trial networks.
VMO2 will be offering wholesale products soon. Sky don’t own their delivery platforms: they rent satellite capacity from SES Astra and their fixed line service from Openreach.
Sky are going to be high up the queue to make a deal with VMO2 for access to their FTTP network.
Even if Comcast did decide they want VMO2 I can’t see it being allowed to happen – the two largest premium pay TV companies in the country merging would take away what competition Sky have.
The rumours have been rumbling for years but never came to anything substantial. VMO2 have their own plans, Sky would have to acquire a controlling stake in Liberty Global to take VMO2 in a more hostile manner which would be insanely expensive.
There’s also that VM plan to spend 10 figures each both building to new premises and overbuilding their existing networks. They have access to most Sky content. I am not sure what’s in it for either of them.
Wowsers, New_Londoner, I just noted Comcast’s market cap is 10 times BT’s. Could eat the company with minimal dilution to their shares.
Surely the Altice investment in BT was a precursor to something?
I doubt that VM02 and Sky will be allowed to merge in any form. If it was to go through, you would in effect have a virtual monopoly of UK Pay TV with VM02 SKY having cable, pay satellite and potentially a large IPTV base with the launch of SkyX and Virgin’s plans to move from HFC to fibre.