Brave New World For UK Telecom-Media: Virgin Media In Talks To Merge With O2

Mobile network operator O2 has entered into merger talks with British telecommunications firm Virgin Media in a deal that – if consummated -- would drastically alter the telecom-media landscape in the U.K. and create a formidable rival to BT Group plc and Sky.

Such a deal would be valued at about $30 billion.

O2 is a subsidiary of debt-ridden Spanish multinational Telefonica (TEF), while Virgin Media is owned by cash-flush Liberty Global (LBTYA).

The deal would be structured as a 50-50 joint venture and would help Telefonica pay down its huge $40 billion debt burden.

O2 is the U.K.'s largest phone company with about 34 million users. Virgin Media has some 6 million broadband and cable TV customers and another 3 million mobile users.

O2 generated revenues of $7.7 billion last year, or about 15% of Telefonica’s global total.

"The process initiated by both parties is in a negotiation phase, not being able to guarantee, to this date, neither the precise terms nor the probability of its success," Telefonica said.

BT owns the U.K.'s second-largest mobile network EE and it has 28 million mobile, TV and broadband customers across Britain.

Telefonica has tried to unload O2 before – in 2015 a proposed sale to Hong Kong-based conglomerate Hutchison Whampoa for $12.8 billion was blocked by the European Commission over competition concerns.

Telefonica later tried to spin off O2 on the London stock market in order to reduce its debt, but that deal was postponed because of uncertainties surrounding Brexit.

However, now in 2020, telecoms analyst Paolo Pescatore of PP Foresight thinks a merger between O2 and Virgin Media could overcome regulatory matters, citing that the two companies offer complementary businesses.

"If you're an O2 customer, you'll be able to buy more than just mobile,” he said. "If you're a Virgin Media customer, the vision -- ultimately -- will be that you can buy everything in one place with one bill, which isn't the case today."

Engadget commented that a merger between O2 and Virgin “could lead to a more consolidated U.K. telecom space with fewer choices for services,” and would have global ripple effects. “Telefonica has been scaling itself back to focus on four markets -- uniting O2 with Virgin could jumpstart that strategy,” Engadget wrote. “Liberty Global, meanwhile, could use this to expand its foothold in Europe and bring its set-top platform (Horizon TV) to more people.”

The Guardian reported that since Liberty Global also owns a 10% stake in British television channel ITV, there is some speculation about Liberty Global eventually including ITV in the deal with O2.

ITV has been suffering a loss of ad revenues.

In 2006, the former owner of Virgin Media, Sir Richard Branson, tried to take over ITV, but Sky upended his plans by purchasing a stake in it.

Last year, Liberty Global unloaded its German and Eastern European cable assets to Vodafone (VOD) for $19.7 billion. As such, Liberty Global has about $7 billion in cash for potential new investments.

Liberty Global had in fact held talks with Vodafone before to combine their U.K. assets, but nothing came from it. They did however form a joint venture agreement in the Netherlands in 2016, which combined their cable and mobile networks.

Last year, Vodafone and Virgin Media signed an agreement in the U.K. to use each other’s networks.