Last checked at 
* Deal combines Virgin Media with O2
* Will provide tougher competition to BT
* Targets 6.2 bln stg of synergies
(Adds comment, detail, updates shares)
By Paul Sandle and Isla Binnie
LONDON/MADRID May 7 (Reuters) - Liberty Global and
Telefonica have agreed to merge their British
businesses in a $38 billion deal that will create a powerhouse
in mobile and broadband to take on market leader BT.
In the biggest shake-up of 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-largest mobile operator.
The tie-up mirrors a succession of European deals struck by
Liberty's billionaire founder John Malone to create one-stop
shops for mobile and broadband. The Telefonica deal will allow
the debt-laden Spanish company to extract cash while remaining
in Britain, having tried and failed to sell O2 in 2016.
It will also force rivals Vodafone, Comcast's
Sky, Three UK and TalkTalk to
examine whether they need to have the full set of fixed and
mobile assets to keep up.
"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
superfast internet speeds in both mobile and broadband.
Telefonica CEO Jose Maria Alvarez-Pallete said the two
businesses would be "much stronger together".
Under the terms of the deal, one of the biggest since the
coronavirus pandemic upended the world economy, the parent
companies will have equal ownership of the combined entity. They
expect to achieve 6.2 billion pounds ($7.7 billion) in total
operating benefits, equivalent to 540 million pounds a year by
the fifth full year after closing.
The deal values O2 at 12.7 billion pounds and Virgin Media
at 18.7 billion pounds, giving a combined value of 31.4 billion
pounds including debt.
Liberty will pay Telefonica 2.5 billion pounds to equalise
ownership. After recapitalisations, the Spanish group expects to
receive further proceeds of 5.7 billion pounds. Liberty will
receive 1.4 billion pounds, the companies said.
HEAVY INVESTMENT
The newly formed entity will invest 10 billion pounds in the
UK market over five years.
That will help it to keep up with former British monopoly
BT, which on Thursday announced it was spending 12 billion
pounds to upgrade its legacy copper network to faster full-fibre
connections, targeting 20 million premises by the mid-to-late
2020s.
The new group will also hope to capture a bigger share of
the business sector, competing with BT and Vodafone just as the
coronavirus pandemic forces companies to cut spending.
It could further hurt Vodafone, the world's second-biggest
mobile operator, which has struggled in its home UK market and
had signed a deal to provide mobile services to Virgin from next
year.
Shares in BT, which announced separately that it was
suspending its dividend until 2021/22, fell as much as 12% to an
11-year low of 101.1 pence before retracing some losses.
Telefonica's share rose 3.5% at the market open but turned
negative as investors digested news of the deal and of falling
quarterly profit and an option for shareholders to receive part
of their 0.40 euros dividend in stock.
Alvarez-Pallete, who has responded to concerns over low
profit growth and high debt with a plan to focus on more
profitable markets including Britain, told a virtual news
conference he had not expected the market to reward Thursday's
announcement immediately.
"We are convinced that with both these actions - signing
this deal and the dividend policy we have proposed - our company
gets stronger," he said.
Including O2, Telefonica's UK business has about 34.5 mobile
connections and generated 14.7% of group sales last year.
Vodafone shares dipped 1% in morning trade before edging
into positive territory in the afternoon.
NEW WORLD
"Personally, I think the industry needs consolidation so
it's a sensible move. It follows our strategy," BT CEO Philip
Jansen told reporters, noting how Britain's largest fixed-line
provider bought its biggest mobile network, EE, in a deal that
closed in early 2016.
Liberty's Fries said the merger talks with Telefonica
started before the coronavirus outbreak swept the world.
CCS Insight analyst Kester Mann said the O2 brand had strong
customer loyalty so should be kept if any others were to be cut.
Virgin Media, bought by Malone in 2013, was formed from a
combination of Britain's cable assets and Virgin Mobile, the
pioneering virtual mobile network, in 2007. It licenses Richard
Branson's Virgin brand and has about 6 million cable customers
and 3.3 million mobile customers.
The 79-year-old Malone has built his empire over more than
40 years of dealmaking in the cable and pay-TV industry, funded
largely through debt.
Liberty is one of Europe's largest TV and broadband
companies, with operations in six countries under the consumer
brands of Virgin Media, Telenet and UPC. Malone sold his
networks in Germany and central Europe to Vodafone last year as
part of the wave of deals to combine mobile with fixed-line
operations.
Analysts expect this deal, which involves predominantly
mobile and fixed-line operators rather than two mobile firms, to
be approved by regulators, as occurred with BT's purchase of EE.
Liberty was advised by J.P. Morgan and LionTree while
Citigroup acted as financial adviser to Telefonica.
($1 = 0.8116 pounds)
(Additional reporting by Juby Babu and Pamela Barbaglia
Writing by Kate Holton
Editing by Mark Potter and David Goodman)
