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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 Liberty's Virgin Media cable network company,
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 would reshape Britain's
telecoms industry, leaving Hutchison and Vodafone
stranded without their own fixed-line consumer networks.
If successful, the deal would end uncertainty around the
fate of one Britain's biggest mobile operators after it was
repeatedly touted as a possible candidate for an initial public
offering 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.
Malone, who transformed the pay-TV sector in the United
States, combined Liberty's Dutch operations with Vodafone's in
2016 in a joint venture deal which could offer the blueprint for
a merger of O2 and Virgin Media, one of the sources said. He
added that discussions between Telefonica and Liberty were
focusing on creating a joint venture equally owned by the two
firms.
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.
The business, led by boss Mark Evans, became the first
British network to offer Apple's iPhone in 2007, a deal that
attracted more high-value customers to the brand.
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 is expected to plough the cash from the Vodafone
sale into the O2 deal, said the source who commented on a
possible blueprint for a merger, 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.
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 Jane Merriman, Jonathan Oatis and
Leslie Adler)
