Last checked at 
* Deal combines Virgin Media with O2
* Will provide tougher competition to BT
* Targets 6.2 bln stg of annual synergies in five years
(Adds reaction, industry context, 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, including debt, 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 deals struck by Liberty's
billionaire founder John Malone in Europe that have created
one-stop shops for consumers in mobile and broadband, and will
allow Spain's debt-laden Telefonica to extract cash, while
remaining in Britain after it 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 with the two major market players.
"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 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) of synergies
on an annual basis by the fifth full year after closing.
The deal values O2 at 12.7 billion pounds and Virgin Media
at 18.7 billion pounds, including debt. The newly formed entity
will invest 10 billion pounds in the UK market over five years.
That will help it keep up with BT, Britain's one-time
monopoly 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 at a time
when the virus pandemic is forcing companies to cut spending.
It could further hurt Vodafone, the world's second-biggest
mobile operator which has struggled in its home UK market,
because it had signed a deal to provide mobile services to
Virgin from next year.
Shares in BT, which announced separately it was suspending
its dividend until 2021/22, fell as much as 12% to an 11-year
low of 101.1 pence.
Vodafone shares were down 1% to 111.4 pence at 0930 GMT,
while Telefonica's were little changed at 4.25 euros.
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.
"We felt confident enough in our respective businesses,
given the fact that we are providing vital services throughout
the country, to continue those discussions and they just reached
a natural conclusion," he told reporters, adding branding for
the combined group had not been decided.
CCS Insight analyst Kester Mann said it would make sense to
keep the O2 brand, if they only keep one to cut costs, because
it had built stronger customer loyalty.
Virgin Media was formed from a combination of Britain's
cable assets and Virgin Mobile, the pioneering virtual mobile
network, in 2007, and bought by Malone in 2013. It licenses
Richard Branson's Virgin brand.
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 same wave of combining fixed lines with mobile.
The tie-up resolves 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 operator Three UK,
controlled by CK Hutchison Holdings.
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 Barbadglia;
writing by Kate Holton; editing by Mark Potter)
