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* Deal combines Virgin Media with O2
* Will provide tougher competition to BT
* Targets 6.2 bln stg of annual synergies in five years
(Adds details, backgound, shares)
By Paul Sandle and Isla Binnie
LONDON/MADRID May 7 (Reuters) - Liberty Global Plc
and Telefonica SA have agreed to merge their British
businesses in a $38 billion deal including debt that will step
up the challenge to market leader BT in mobile and broadband.
In the biggest shake-up in the British telecoms market for
five years, the deal will bring together the biggest cable TV
provider in Liberty's Virgin Media with Telefonica's O2, the
second-biggest mobile operator.
It marks the latest move by Liberty's veteran billionaire
dealmaker John Malone, the U.S. cable pioneer who has pulled off
a string of transactions in Europe in recent years, including
the sale of networks in Germany and central Europe to Vodafone
as part of the same trend of combining fixed lines with mobile.
It will also allow debt-laden Telefonica, which tried and
failed to sell O2 in 2016, to extract some cash from the
business while keeping a presence in Britain.
"It's not a secret any more, when 5G meets 1 gig broadband
we know magic can happen for customers," Liberty Global CEO Mike
Fries told reporters on a conference call, referring to
super-fast internet speeds in both mobile and broadband.
Telefonica Chief Executive Jose Maria Alvarez-Pallete said
the two businesses would be "much stronger together".
The parent companies, which expect to achieve 6.2 billion
pounds ($7.7 billion) of synergies on an annual basis by the
fifth full year after closing, will have equal ownership of the
combined entity, they said on Thursday.
The joint venture will invest 10 billion pounds in the UK
market over the next five years, helping it to also compete with
the likes of Comcast's Sky, the leader in pay-TV,
Vodafone and Three.
The companies said the deal would value Telefonica's O2 at
12.7 billion pounds and Liberty's Virgin Media at 18.7 billion
pounds, both on a total enterprise value basis, including debt.
At 0725 GMT, Telefonica shares were up 2.6% at 4.394 euros.
Shares in BT, which announced separately it was
suspending its dividend until 2021/22 due to the coronavirus
pandemic, were down 5.5% at 107.95 pence.
The combination could finally resolve a question over the
fate of O2 which has been open since 2016, when European
regulators blocked a 10.3 billion pound takeover by smaller
mobile Three UK, controlled by CK Hutchison Holdings.
Hutchison and fellow major operator Vodafone now face being
stranded without their own large fixed-line consumer networks.
Analysts expect the deal to be approved by regulators. While
British competition authorities have toughened their approach in
recent years, the combination of a mobile network with a
broadband network is unlikely to cause major problems.
BT's 2016 acquisition of EE, bringing together the country's
biggest broadband and mobile operators, was waved through by
regulators who reasoned there was little overlap between fixed
and mobile operations, and therefore a low risk to competition.
Both parties expect to receive net cash proceeds at closing
following a series of recapitalisations that will generate 5.7
billion pounds in proceeds for Telefonica and 1.4 billion pounds
for Liberty, they said.
($1 = 0.8116 pounds)
(Additional reporting by Juby Babu in Bengaluru; writing by
Kate Holton in London; Editing by Subhranshu Sahu and Mark
Potter)
