UK comms market set for shake-up as O2 and Virgin Media confirm merger

In a potentially seismic shift for the UK telecoms industry, Liberty Global and Telefónica have revealed that their respective UK subsidiaries, cable company Virgin Media and mobile operator O2, are to merge their operations.

The 50-50 joint venture, expected to close around the middle of 2021 subject to regulatory approvals and other conditions, will create what the partners say will be the UK’s leading integrated fixed-mobile communications provider with more than 46 million video, broadband and mobile subscribers in the country with and an estimated £11bn of revenue.

The deal will combine O2’s core network of mobile users as well as those from mobile virtual network operators (MVNOs) Giffgaff, Sky Mobile, Tesco Mobile and Lycamobile with the Virgin cable network, which is rapidly being upgraded for gigabit broadband.

The combined networks would see the synergy of Virgin’s plans to offer gigabit speeds to more than 15 million homes across its network by the end of 2021, delivering half the UK government’s stated broadband ambition for fibre networks four years early, with O2’s expanding 5G network, which was launched in October 2019.

The two companies claim the joint venture will generate “significant” operating benefits, with estimated run-rate cost, capex (capital expenditure) and revenue synergies of £540m annually by the fifth full-year post closing, equivalent to a net present value of about £6.2bn post-tax and net of integration costs.

Also, synergies are envisaged from the accelerated usage of existing tax assets. The vast majority of the benefits relate to demonstrable cost and capex synergies, with an annual run rate of about £430m, out of which some 80% are expected to be achieved by the third full year after the closing.

The principal cost and capex synergies include the use of existing infrastructure to provide services for each company’s customers at lower cost compared with standalone/wholesale capabilities and the migration of Virgin Media mobile traffic to Telefónica UK’s network. The JV is also expected to realise sigificant growth through cross-selling opportunities and scale, resulting in revenue synergies with an estimated annual run-rate of about £110m annually.

Executive leadership of the joint venture will be agreed before the closing. The board will have eight members, four from each of Liberty Global and Telefónica. Mike Fries, CEO of Liberty Global, and José María Álvarez-Pallete, chief executive of Telefónica, will sit on the board. The post of chairman will be held for alternating two-year periods by Liberty Global or Telefónica, with Liberty Global holding the position first.

Liberty Global CEO Mike Fries said that with Virgin Media and O2 together, the future of convergence was here today. “We couldn’t be more excited about this combination,” he said. “Virgin Media has redefined broadband and entertainment in the UK with lightning fast speeds and the most innovative video platform, and O2 is widely recognised as the most reliable and admired mobile operator in the UK. When the power of 5G meets one-gig broadband, UK consumers and businesses will never look back.”

Telefónica chief executive officer Álvarez-Pallete added: “Combining O2’s number one 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. We are creating a strong competitor with significant scale and financial strength to invest in UK digital infrastructure and give millions of consumer, business and public sector customers more choice and value.

“This is a proud and exciting moment for our organisations as we create a leading integrated communications provider in the UK.”

The merger came just as both companies announced their first-quarter 2020 results. O2’s total revenue for the quarter ending 31 March 2020 reached £1.498bn, up 1.5% year on year. The revenue increase was attributed mainly to higher-value handset revenues and continued growth in SMIP and MVNO revenues.

Total connections, including customers who use the O2 network through Giffgaff, Tesco Mobile, Sky Mobile and Lycamobile, reached 34.8 million at 31 January 2020, a 6.3% year-on-year increase, with Telefónica UK remaining the number one UK mobile network carrier. Operating income before depreciation and amortisation (OIBDA) for the quarter inched upward 1% year on year to £444m, with OIBDA margin at 29.7%.

O2 said that since 17 March, its network has been carrying up to 60% additional voice traffic at the busiest point of the day. At its peak, the increase was comparable to six years of regular year-on-year growth. The company doubled the capacity of its voice network to accommodate this increase and said it continues to actively monitor the network to maintain voice and data connectivity for all customers.

Virgin Media revealed that for the first quarter ending 31 March 2020, it generated revenue of £1.266bn, 0.7% year on year on a reported basis and 0.6% on a rebased basis. Increases in subscription revenue across the business were offset by declines in mobile and B2B non-subscription revenues. Residential cable revenue increased 0.8% on a reported basis and 0.9% year on year on a rebased basis.