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CMA provisionally clears merger of Virgin and O2

Six months after being requested to review joint venture that could transform UK’s wired and wireless communications provision, UK competition watchdog CMA removes potential major hurdle to Virgin and O2 merger

Almost six months after it asked to review the coming-together of leading fixed-mobile provider and cable network provider that will create genuine competition to BT/EE, the UK’s Competition and Markets Authority (CMA) has provisionally cleared the proposed merger of Virgin Media and Virgin Mobile with O2.

The proposed combination of Virgin Media and Telefónica UK brand O2 would create a nationwide integrated communications provider with more than 46 million video, broadband and mobile subscribers, and an estimated £11bn of revenue.

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

Crucially, it will add to Virgin’s fixed network O2’s expanding 5G infrastructure, which would enable the merged company to compete head-on with BT and its EE mobile subsidiary, which has taken a clear lead in UK 5G.

When the deal was first announced in May 2020, Telefónica and Liberty Global said they expected it to close around the middle of 2021, subject to regulatory approvals and other conditions. The former has kicked in after the CMA saw the deal as falling under its purview, given its potential impact on competition in several retail and wholesale telecommunication markets in the UK.

The CMA was clear at the outset of its inquiry that it was not concerned about overlapping retail services such as mobile, due to the small size of Virgin Mobile. It therefore focused on whether the merger could lead to reduced competition in wholesale services as part of its review.

One key area of interest was in backhaul. In this regard, Virgin provides wholesale leased lines to UK telcos and O2 rivals Vodafone and Three, and O2 offers mobile operators such as Sky and Lycamobile, which do not have their own mobile network, use of the O2 network to provide their customers with mobile phone services.

The CMA was initially concerned that, following the merger, Virgin and O2 could raise prices or reduce the quality of these wholesale services, or withdraw them altogether. If this were to happen, the CMA warned that the quality of these other companies’ mobile services could suffer and – if wholesale price increases were passed on by these companies to their customers – their retail prices could go up.

This, added the CMA, might make Virgin and O2’s own mobile service comparatively more attractive to retail customers, but would ultimately lead to a worse deal for UK consumers. Such concerns led to the merger being referred to a group of independent CMA panel members for an in-depth phase 2 investigation.

Yet having examined the evidence, the CMA inquiry group has now provisionally concluded that the deal is unlikely to lead to any substantial lessening of competition in relation to the supply of wholesale services.

The CMA gave a number of reasons for this. It argued that backhaul costs are only a relatively small element of rival mobile companies’ overall costs, so it was unlikely that Virgin would be able to raise backhaul costs in a way that would lead to higher charges for consumers.

In addition, it felt that there were other players in the market offering the same leased-line services, including BT Openreach, which has a much greater geographical reach than Virgin, and other smaller providers. This means the merged O2/Virgin would still need to maintain the competitiveness of its service or risk losing wholesale custom.

The authority also believed that with leased-line services, there were a number of other companies that provide mobile networks for telecoms firms to use, meaning O2 would need to keep its service competitive with its wholesale rivals in order to maintain this business.

“Given the impact this deal could have in the UK, we needed to scrutinise this merger closely,” said CMA panel inquiry chair Martin Coleman. “A thorough analysis of the evidence gathered during our phase 2 investigation has shown that the deal is unlikely to lead to higher prices or a reduced quality of mobile services – meaning customers should continue to benefit from strong competition.”

Offering comment on the CMA’s ruling, Ernest Doku, mobiles expert at broadband and mobile comparison site Uswitch.com, said the ruling clears the way for the combined company to take on the might of BT, but it was vital that the combined brands maintain the high standards of service that customers have come to expect.

“The merger is likely to stir up the industry, with Vodafone previously showing interest in Virgin Media, and Three attempting to snap up O2 five years ago,” he said.

“Both the O2 and Virgin Media brands are likely to remain in the short term, but we will have to see what this means for existing products and services like O2 Priorities. There’s the potential for the combined firms to make millions of pounds of annual savings, and for consumers this tie-up could mean a greater choice of entertainment and faster speeds.”

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