Telefonica SA Reportedly Ponders UK Takeover of Virgin Media O2
A new report claims that debt-laden Telefonica SA is allegedly drawing up plans that would enable them to take control of the 50/50 UK Joint Venture (JV) that it owns with Liberty Global, which reflects broadband and mobile provider Virgin Media and O2 (VMO2). In addition, they also have another JV with InfraVia Capital Partners to build a new fibre network in the UK (nexfibre).
The new Bloomberg (paywall) report follows VMO2’s recent quarterly results (here and here), which revealed both a sudden slowdown in nexfibre’s roll-out of their new full fibre (FTTP) broadband ISP network and a “pause” in Virgin Media’s related but technically separate plan to open up their existing fixed broadband network to wholesale via a new NetCo.
Just to recap. Nexfibre is the product of a £4.5bn joint venture (here) between Telefónica, Liberty Global and InfraVia Capital Partners, which originally aimed to deploy an open access full fibre network to reach “up to” 7 million UK homes (starting with 5m by 2026) in areas NOT served by Virgin Media’s own network of 16m+ premises (Telefonica and Liberty Global also own Virgin Media and O2 in the UK).
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The CEO of Liberty Global, Mike Fries, later made clear that this was partly due to their JV partner, Telefonica (inc. political pressure from the government of Spain, which has a say in the Spanish company), which had announced a strategic review of the business due to its heavy debts (c.£23bn) and other issues.
Fries also spoke of the need to “retain capital discipline in an increasingly irrational altnet environment“ (i.e. avoiding too much overbuild of other networks), while hinting that nexfibre might still be able to boost its network expansion through consolidation (M&A).
In addition, both Telefonica and Liberty Global now also have the right to kick off an initial public offering (IPO) for VMO2 after a lock-up period under the terms of the £31bn merger expired last year. But this is tricky, as neither side will want to take on the full burden of all those debts. The terms also allow each partner to sell its stake to a third-party 5-years after the closing, but the other shareholder still has a right of first refusal.
However, according to Bloomberg’s new report, a proposed deal is being “drawn up” that would allow Telefonica SA to take control of the UK Joint Venture. The article appears to indicate that they’re talking about VMO2, although it’s unclear where this would leave nexfibre, and we suspect it may be better to think of this as just being one of several potential options. But officially, there’s nothing solid on the table, yet.
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Emilio Gayo, Telefonica’s COO, said today:
“We’re very happy with the current situation. The joint venture is working very well, we don’t have any proposals on the table to change that situation at the moment. Both companies, Liberty and Telefonica, are trying to find the best ways to develop the business.”
Strategic reviews of major businesses like this can often take a few months to run their course, thus we probably won’t get a better idea of the direction that VMO2 and nexfibre will be taking post-2025 until toward the end of summer or later this year. The outcome could produce a significant change in ownership and strategy toward the UK, but it might equally continue or even accelerate the current approach.
In the meantime, there seems to be somewhat of a spanner stuck (partially) in the works, which is slowing but not completely choking build progress. This is partly because Liberty Global itself remain committed to the UK, even while Telefonica seems uncertain. But it’s also due to the fact that you can’t stop such a major build engine without doing significant damage and removing options for the future (i.e. better to maintain it, albeit at a reduced pace, until the future is more certain).
The news does at least give alternative networks, as well as Openreach (BT), a bit less pressure to worry about. At least over the short term, or potentially longer if the outcome causes more disruption for VMO2 and nexfibre’s original ambitions. Time will tell.
Mark is a professional technology writer, IT consultant and computer engineer from Dorset (England), he also founded ISPreview in 1999 and enjoys analysing the latest telecoms and broadband developments. Find me on X (Twitter), Mastodon, Facebook, BlueSky, Threads.net and Linkedin.
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If they do, then w shall see if O2 gets better or stays as is.
It’s all getting confusing with VMO2, especially with the Daisy tie-up as well. Given that I considered the VM side to be slightly more forward thinking, customer focused, and interested in growing the network than the O2 side, I’d hate for Telefonica to take over the lot.
I am so confused… Telefonica already owns O2 dont they?
This is a disaster waiting to happen.
My gut feeling is…
1) Telefonica will buy out Liberty Global.
2) Once the licence for the Virgin name is up (or possibly before if they choose to buy out the contract), they’ll drop it, saving the costs – which aren’t likely a huge factor, but enough – and re-brand everything as O2.
3) Liberty Global will licence their Horizon TV box software to O2 for a period of time to allow continuity. In the meantime, O2 will start to bring in Android TV boxes, as they have elsewhere in Europe, and open these up to customers on any ISP, not just the VM network (whether IP or HFC). Gradually Horizon (and even TiVo) users will be moved over by a combination of attrition, new equipment, incentives, forced migration, new contracts, software updates (if possible) etc.
4) As VMO2 (present) are continuing to over-build the HFC network with full-fibre, this will continue.
5) Either nexfibre will be divested / spun-out, or it will be absorbed into the main O2 network. Hard to say with this one…
6) The new VMO2 / Daisy B2B will either be remade into O2 Business, or will be spun off. Again, hard to tell, but a spin off will bring ready cash. This would leave new O2 to be a pure triple- / quad-play (depending on your definitions) consumer brand.
Will I be right, probably not – certainly not in all of it, but it’s interesting to speculate and I suspect there’s a high chance of Liberty Global selling-up / being bought out.
@BeeTee:
“1) Telefonica will buy out Liberty Global.”
Agreed as I think it will be affordable.
“2) Once the licence for the Virgin name is up (or possibly before if they choose to buy out the contract), they’ll drop it, saving the costs – which aren’t likely a huge factor, but enough – and re-brand everything as O2.”
Agreed. It’s a nobrainer to use your own brand rather than keep paying Virgin group to retain Virgin Media brand.
“3) Liberty Global will licence their Horizon TV box software to O2 for a period of time to allow continuity. In the meantime, O2 will start to bring in Android TV boxes, as they have elsewhere in Europe, and open these up to customers on any ISP, not just the VM network (whether IP or HFC). Gradually Horizon (and even TiVo) users will be moved over by a combination of attrition, new equipment, incentives, forced migration, new contracts, software updates (if possible) etc.”
The 360 will continue with Liberty Global’s Horizon 4. The only change will be the migration, forced if necessary, to the Apollo streaming box as the future is IPTV. In any case only the Apollo is possible in XGS-PON areas.
“4) As VMO2 (present) are continuing to over-build the HFC network with full-fibre, this will continue.”
Agreed, this is the strategy and a really good one.
“5) Either nexfibre will be divested / spun-out, or it will be absorbed into the main O2 network. Hard to say with this one…”
Telefonica will have a compelling case to buy out InfraVia to gain control of nexfibre, an operator with an anchor tenant (VM) which VM knows only too well as nexfibre’s network has also been built by VM build engine. The merger of nexfibre and NetCo will easily make Telefonica the second biggest network operator. The only issue is having to acquire more debt to fund this.
Is this some weird ‘reverse psychology’ overture to instead encourage Liberty Global to buy out Telefonica’s stake?
I think that Telefonica is looking to boost the price in a potential future sale. They have been focused on building returns in most of their regions by cutting investment. Meanwhile, Liberty Global would seem to be far more committed to the UK than Telefonica, while the latter, like Santander, sees the UK more as a revenue source for its Spanish and Latin American operations.
If this happens I am VERY glad they have allowed the Three and Vodafone merger to go through, because everyone is buying everyone else at this point! Very confusing market.
Since the Liberty Global has taken over, Virgin Media has not really improved their customer satisfaction in any meaningful way. I think the goal of these takeovers are often to extract as much money as they possibly can, whilst cutting costs and without investing in customer services before dumping them on the next investor group.
You only just worked that out?
Customer service is zero for most companies, it is all about making as much money as they can.
What is the problem, is the amount of debt some of these companies carry
Liberty are hardly a random investor group. They rebuilt most of the cable company assets in Ireland when they purchased them. They are responsible for the cable network expansion, the plan before them was to use Openreach copper to expand. Under them a considerable amount of the UK cable network was rebuilt and the whole thing is now going to full fibre.
Can’t say they’re angels but they aren’t some asset stripping private equity firm. They have a long history of investing in the cable networks they bought.
It’s pretty clear to me that Telefonica want to buy out Liberty, float VM02 and try and recoup the debt. Should that happen, what’s the chances Liberty rides to the rescue and gobbles up what’s left of the AltNets?
Telefonica could not make a profitable IPO of VM02 anytime soon.
Santander revisted.
Slow-burn asset stripping a la Slater-Walker
Welcome to the World of no infrastructure
Not that I’ve got any sympathy with Virgin and their off-shore originator.
And why were at it, lets, in the UK, make full use of the destructive desire, and make those rubber dinghies double and triple deckers and really get the wage rates down.
Let’s try and figure out how much Telefonica SA might have to find to buy out Liberty Global. VMO2’s enterprise value is about £31.4 billion but its net debt is about £21.8 billion. So, the difference (equity value) is £9.6 billion and as a 50% shareholder Telefonica will thus have to pay half that (£4.8 billion). However Telefonica’s net financial debt including lease liabilities is around €35.06 billion, meaning it can’t fund this – so will have to issue bonds. I think this might work out quite well especially as the markets know that the Spanish government, a 10% shareholder of Telefonica, is on board.
Telefonica is not ready to handle a takeover. At the moment, it is performing a strategic review of its operations, and this would be just one option. For a business that has just lost another EUR 1.3bn this last quarter, is writing off asset values, and taking significant losses in Latin America it is going to struggle to make the case.