Virgin Media and O2 to join forces in $31bn deal

(Sharecast News) - Broadband provider Virgin Media and mobile phone group O2 are to merge in a $31bn deal, owners Liberty Global and Telefonica announced on Thursday.
The ground-breaking 50:50 merger, which values Telefonica's O2 at ?12.7bn and Virgin Media at ?18.7bn, will create a significant player in the UK's broadband and mobile phone markets. It will also create a major rival for BT Group.

In a joint statement, the two firms said the deal would create a "stronger fixed and mobile competitor in the UK market", which would support the expansion of Virgin Media's network and of the deployment of 5G by O2, currently the UK's second-largest mobile phone operator. The combined company is expected to have more than 46m subscribers and revenue of ?11bn, Liberty and Telefonica said.

Jose Maria Alvarez-Pallete, Telefonica chief executive, said: "Combining O2's mobile business with Virgin Media's superfast broadband network and entertainment services will be a game-changer in the UK, at a time when demand for connectivity has never been greater or more critical."

The deal was expected to deliver synergies of ?6.2bn on a net present value basis after integration costs, and equivalent to cost, capex and revenue benefits of ?540m annually within five years of the deal closing. The new company plans to invest ?10bn in the UK market over five years.

The merger will generate proceeds of ?5.7bn for Telefonica and ?1.4bn for Liberty.

Jasper Lawler, head of research at London Capital Group, said: "[The deal] creates a new telecoms power house to compete with BT. The combination will bring extra bargaining power to potentially achieve what the two entities by themselves never could. Ofcom might finally order the breakup of BT and Openreach.

"It was a double whammy for BT shareholders: the emergence of a huge new rival and the suspension of dividends for two years." BT announced on Thursday that it would not pay a dividend until 2022.

Russ Mould, investment director at AJ Bell, said: "A merger between O2 and Virgin Media creates the UK's largest phone an internet operator. BT will now have a full-fledged competitor in fixed and wireless phone, broadband and television."

As at 1145 BST, shares in BT were trading 7% lower in London, while Telefonica was off 1%.

The deal is expected to close by mid-2021.