Telefonica and Liberty Global are reportedly in talks about a possible merger of their UK assets in a move that would shake up the UK communications market.
A joint-venture would see O2’s mobile network and Virgin Media’s cable operations united into a single unit that would immediately become one of Europe’s largest telcos.
O2 currently has 34.5 million users on its network, a figure which includes mobile virtual network operators (MVNOs) such as Tesco Mobile, while Virgin Media has more than 5 million subscribers.
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O2 Virgin Media
Telefonica came close to selling O2 to Three’s parent company CK Hutchison in 2015. A £10.25 billion deal to merge the two operators was agreed but the European Commission blocked the move due to competition concerns.
At the time, both parties said the merger was necessary to compete in a market that was consolidating. Without fixed networks to leverage, it was argued that Three and O2 could not survive as pure-play mobile operators unless they joined forces.
Despite these warnings, O2 has performed well for Telefonica in the intervening years, with Telefonica looking towards an IPO rather than a sale. Revenues last year were €7.1 billion – 15 per cent of Telefonica’s global total, according to Bloomberg data. However any IPO has been postponed due to ongoing uncertainty surrounding Brexit, while the coronavirus crisis is unlikely to have provided any additional clarity.
Virgin Media was first linked with a takeover of O2 in the immediate wake of the collapsed merger attempt. Any tie-up with O2 would give it access to a mobile network for the first time.
In 1999 Virgin Media launched Virgin Mobile, the world’s first MVNO, using T-Mobile’s infrastructure to power its services. EE, and later BT, inherited that wholesale deal which has now entered its third decade.
However Virgin Media’s parent company Liberty Global has been getting closer to Vodafone over the past few years. Last year Vodafone bought Liberty’s German and Eastern Eiropean cable assets, while the two companies have established a joint-venture in the Netherlands.
Further discussions about “asset swaps” had led to speculation that a similar deal in the UK could be next. Such a development has yet to materialise, but Vodafone will replace EE as Virgin Mobile’s wholesale partner from next year in a five year agreement lasting until 2026.
Bloomberg suggests a transaction could be announced “as early as next week” while there is additional speculation about the future of ITV. Liberty Global has a 10 per cent stake in the broadcaster which is suffering from the economic impacts of coronavirus. Rumours of a full takeover have strengthened as a result.
A combined mobile, broadband and television multimedia organisation could be in a better position to take on Sky and BT. It is a tactic that Liberty Global has employed in Ireland, where it bought the TV3 Group and rebranded it ‘Virgin Media Television’
Virgin Media declined to comment, while Telefonica pointed to a statement it submitted to Spanish regulators: "In relation to the news published in some media regarding the discussions with Liberty Global on a potential integration of their respective telecommunications businesses in the United Kingdom, Telefónica informs that the process initiated by both parties is in a negotiation phase, not being able to guarantee, to this date, neither the precise terms nor the probability of its success.
"In the event of a satisfactory agreement on this potential transaction, Telefónica will communicate such information to the markets."
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Steve McCaskill is TechRadar Pro's resident mobile industry expert, covering all aspects of the UK and global news, from operators to service providers and everything in between. He is a former editor of Silicon UK and journalist with over a decade's experience in the technology industry, writing about technology, in particular, telecoms, mobile and sports tech, sports, video games and media.