Virgin Media, O2 merger gains final UK regulatory approval

Competition watchdog CMA removes last stumbling block and gives green light for what is being described as a watershed moment for the UK comms market

The 50-50 joint venture between Liberty Global and Telefónica to combine Virgin Media and O2 has cleared its final legal hurdle, after gaining approval from the UK’s Competition & Markets Authority (CMA).

Six months after first declaring an interest, the CMA has cleared the transaction without remedies and now all regulatory conditions are met in alignment with the original terms. The deal is now expected to close by 1 June.

In calling for a review of the deal, the CMA had expressed a concern that following the merger, Virgin and O2 could raise prices or reduce the quality of these wholesale services. If this were to happen, it said it could lead to other companies being forced to offer lower quality mobile services or increase their retail prices, too.

Despite their initial concerns, the CMA has now deemed the merger as providing healthy competition in the telco space.

The 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.

The two companies say their combined form will also create a stronger fixed and mobile competitor in the UK market, supporting the expansion of Virgin Media’s gigabit network and O2’s 5G mobile deployment. It is also claimed to be able to deliver substantial synergies valued at £6.2bn on a net present value basis after integration costs, and will create a nationwide integrated communications provider with £11bn of revenue.

The deal will unite 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.

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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 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.

The deal is also expected to realise large 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 a lower cost compared with standalone and wholesale capabilities, and the migration of Virgin Media mobile traffic to Telefónica UK’s network.

The JV is also expected to realise significant growth through cross-selling opportunities and scale, resulting in revenue synergies with an estimated annual run-rate of about £110m annually.

Vodafone deal

In November 2019, Virgin Mobile signed a five-year deal with Vodafone to run from 2021 to 2026, which will see Vodafone supply wholesale mobile network services, including voice and data, to Virgin Mobile and Virgin Media Business. Virgin Media has full access to all of Vodafone’s current services and future technologies, such as its 5G network, which began operating in the UK in July 2019.

On completion of the deal, Lutz Schüler, currently CEO of Virgin Media, will act as CEO, and Patricia Cobian will act as chief financial officer of the combined company.

In a joint statement on the deal, Liberty Global CEO Mike Fries and Telefónica CEO José Maria Alvarez-Pallete called the deal a “watershed moment” in the history of telecommunications in the UK.

“We are now cleared to bring real choice where it hasn’t existed before, while investing in fibre and 5G that the UK needs to thrive,” they said.

“Lutz and Patricia are now set to take the reins and launch a national connectivity champion that will connect more people, ignite more businesses back to growth and power more communities for the greater good.” 

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