(Adds context)
By Belén Carreño and Pamela Barbaglia
MADRID/LONDON May 1 (Reuters) - Spain's Telefonica SA
is in talks with billionaire John Malone's Liberty
Global Plc to explore a merger of its British mobile
operator O2 with cable network company Virgin Media, two sources
familiar with the matter said.
Telefonica has been weighing options for the mobile business
since 2016 when a previous 10.3 billion pound deal takeover of
O2 by Three UK, controlled by CK Hutchison Holdings,
was blocked by European antitrust regulators, banking sources
said.
A combination of O2 and Virgin Media is expected to reshape
Britain's telecoms industry, leaving Hutchison and Vodafone
stranded as mobile-only operators.
If successful, the deal would end uncertainty around the
fate of Britain's second-biggest mobile operator after it was
repeatedly touted as a possible candidate for an initial public
offering (IPO) in recent years.
It would also offer Telefonica a way to partially cash out
from O2 while retaining a presence in Britain which the company
sees as one of its "core markets" along with Spain, Germany and
Brazil.
Shares in Liberty were up 8.75% at $21.12 on the news which
was first reported by Bloomberg.
Telefonica has been active in Britain since 2006 when it
took control of O2 and helped boost its customer base securing
25.8 million contracts and pre-paid mobile subscribers at the
end of 2019.
Telefonica's UK business, which includes O2, generated 7.11
billion euros in revenue in 2019, around 14.7% of the group’s
total and had 34.5 mobile connections on its network.
Faced with dwindling profits, the company announced in
November a turnaround plan to bring in 2 billion euros a year in
extra revenue by hiving off part of its Latin American business
and focusing on its core markets including Britain.
At the time, Chief Executive Jose Maria Alvarez-Pallete said
the company was open to reviewing possible merger options.
Liberty Global, which has controlled Virgin Media since
2013, sold its cable networks in Germany and central Europe to
Vodafone in a $22 billion deal which was finalised last year,
reigniting talk among analysts of a deeper tie up in Britain.
The firm, led by tycoon John Malone, is expected to plough
the cash from the Vodafone sale into the O2 deal, one of the
sources said, cautioning no final agreement had been reached.
Virgin Media competes with UK pay-TV market leader Sky,
owned by Comcast, in pay-TV, and with BT, Sky,
TalkTalk and others in broadband.
It had 6 million cable customers and 3.3 million mobile
customers as of the end of 2019.
But despite its sizeable mobile business Virgin Media has
never owned its own wireless network.
It instead pioneered the MVNO model, whereby an operator
piggybacks on an existing network, 20 years ago with a
partnership with the forerunner of BT's EE.
(Reporting by Belen Carreno in Madrid and Pamela Barbaglia in
London; additional reporting by Paul Sandle, Nathan Allen and
Bhargav Acharya; Editing by Shinjini Ganguli, Jane Merriman and
Jonathan Oatis)