Virgin Media O2 UK Puts Possible £3bn TalkTalk Merger on Ice

A major newspaper has reported that Virgin Media (VMO2) has allegedly gone cold on the idea of reaching a £3bn merger deal with budget UK ISP TalkTalk, which would have added the provider’s broadband base of over 4.2 million to their own base of 5.6 million in order to more effectively compete with BT.

The deal became a hot topic in mid-July after multiple newspapers reported that talks were underway (here), which could have created a broadband operator with a comparable customer base to BT’s. Such a deal may have also helped to support VMO2’s plans to expand their Fibre-to-the-Premises (FTTP) network to a further 7 million UK premises by 2027 via a new joint venture (here).

However, the Sunday Telegraph (paywall) claims that VMO2’s parents may have had a rethink due to market and regulatory uncertainties, which partly reflects the UK’s wider economic turmoil (i.e. debt markets are not as accessible as they were a few months ago) and questions over what position the Competition and Markets Authority (CMA) might have taken. Not to mention the recent issues with TalkTalk’s accounting practices (here).

On top of that there’s a question mark over whether or not TalkTalk is worth £3bn. Back in 2020 they became the subject of a £1.1bn takeover by Toscafund (here), which including debt valued the broadband provider at around £1.8bn. But since then they’ve backed altnet builder Freedom Fibre (here), acquired Ethernet provider Virtual1 (here) and gobbled up Ovo Energy‘s (SSE) broadband base of 135,000 customers (here).

Despite this, the newspaper reports that VMO2 and TalkTalk are still allegedly engaged in “strategic discussions“, which are thought to include the possibility of the ISP harnessing Virgin’s network as part of a wholesale agreement. VMO2 have long planned to wholesale out access to their existing network, and they’re also establishing an open access network via a new joint venture, which will extend their fibre to another 5-7 million premises.

At the same time, TalkTalk are, much like other ISPs, also in talks with Openreach about the possibility of introducing further price cuts to FTTP under a new ‘Equinox 2‘ discount scheme (here). The Sunday Times appears to suggest that such a deal could raise questions over TalkTalk’s existing relationship with its other major network partner, Cityfibre. But so far the ISP has done a reasonable job of adopting both in a complementary fashion and Equinox 2 may not be aggressive enough to remove Cityfibre’s cost advantage (e.g. TalkTalk’s 1Gbps package on Cityfibre is just £36, but that goes up to £49 on Openreach).

Mind you, had TalkTalk and VMO2 agreed to merge as previously proposed, then that could have had a much bigger impact on the provider’s wholesale relationships with Openreach, Cityfibre and Freedom Fibre. But without a merger, TalkTalk may at some point need to raise more funding to keep their balance sheet in order.