Liberty’s Virgin Media and Telefonica’s O2 to merge in the UK in $39B deal

The regulators said NO" when Telefonica tried to combine its O2 operations in the UK with rival carrier, Hutchison-owned Three, back in 2015. But Telefonica didn't let go of the idea of divestment, and five years later, in the middle of a health pandemic with related threats of a global economic depression looming over us, comes the latest effort on that front.

Telefonica and Liberty Global today announced a plan to merge the Spanish telco's UK mobile carrier O2 with Virgin Media, a pay-TV and broadband provider in the country owned by Liberty.

The deal is huge. Based on a valuation of 12.7 billion for O2 and 18.7 billion for Virgin media, it works out to a combined enterprise valuation of 31.4 billion, or nearly $39 billion at current rates. It will create a business with 46 million video, broadband and mobile subscribers and 11 billion of revenue, the companies said.

As a point of reference, BT - one of Virgin's and O2's biggest competitors on the fixed-line, broadband and TV front, which long ago used to own O2 before spinning it out - is valued at only 10.4 billion, or $12.8 billion. Vodafone - a big competitor mostly on mobile - is valued at $358.95 billion, or $456 billion, although it has vast international holdings; its UK business would represent a fraction of that.

O2 is coming into the deal on a debt-free basis while Virgin Media is bringing 11.3 billion of net debt and debt-like items" into the marriage. The transaction, they said, is expected to close around the middle of 2021 and is subject to regulatory approvals.

The deal underscores the bigger consolidation trend that has been playing out for years, where smaller and more narrowly focused businesses are coming together with those that offer either complementary services to offer better bundles, or overlapping ones for more economies of scale.

But its timing is also very notable. As we've pointed out before, M&A activity has largely slowed down in the current market, but we're still seeing deals (and funding rounds) in cases where the price is right or a business is worth keeping around and bolstering.

This deal ticks both of those boxes, but you could add a third line of reasoning, which is that we may be in a more likely moment to see these deals get a nod when they might have been scrutinised more in the past. Both Telefonica and Liberty Global have had tastes of costly M&A efforts thwarted after regulators put up flags over antitrust violations.

Vodafone's efforts to buy Liberty Global assets some years ago pointedly did not include Virgin Media in the UK as a result of that, and of course Telefonica's previous efforts to divest O2 in a merger with Three went nowhere, also out of competition concerns.

However, we are seeing a different tack at the moment from regulators, who have pointedly said that not only are they aiming to approve and clear faster a backlog of deals, but to give them a more open-minded treatment given the current state of the market, to keep the economy turning.

The Competition and Markets Authority outlined its updated approach in its recent decision to approve a merger between Takeaway.com and JustEat, a deal that had been in the works for months:

During the COVID-19 outbreak, the CMA is working with businesses where it can to be flexible - for example, by recognising that there may be delays in providing the information it needs to conduct investigations," it said at the time. However, it is also trying to complete investigations efficiently at this time, wherever possible, to provide businesses with certainty. In this case, the CMA was able to publish its final decision 26 days ahead of the statutory deadline."

That doesn't mean, of course, that existing rivals will not make appeals to block or change the terms of the deal, nor that they may not themselves seek to start some M&A activity of their own in response.

In the case of O2 and Virgin Media, the deal is very complementary, since the former's primary and strongest business continues to be as a mobile carrier, while Virgin Media's is of being a broadband and pay-TV provider. Both have operations in each other's service areas but not nearly at the same scale.

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," said Telefonica CEO, Jose Maria Alvarez-Pallete, in a statement. 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."

Mike Fries, Chief Executive Officer of Liberty Global, added in his own statement: 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."