Virgin Media and o2 to Merge in £38bn Deal

Virgin Media and o2

Virgin Media and o2 owners, Liberty Global and Telefonica have announced that they are to merge their UK operations in a 50/50 joint venture.

The combination of Virgin Media and O2 will create a nationwide integrated communications provider with over 46 million video, broadband and mobile subscribers and £11 billion of revenue.

By combining Virgin Media’s market-leading v6 video service and giga-ready broadband network, together with O2’s best-in-class, 5G ready mobile propositions, consumers in the UK will enjoy the highest-quality customer experience possible, with superior connectivity and entertainment both inside and outside the home.

As a fully converged provider, the joint venture will provide more competition in the marketplace and choice for consumers.

In addition, the joint venture will become a leading challenger in the B2B space as the combination will accelerate the adoption of converged fixed-mobile services to Virgin Media’s and O2’s existing business customers and offer new services using both companies’ digital skills, networks and product portfolios, such as cloud, big data, Internet of Things and cyber-security services.

This will ensure sustainable competition in the small, medium and large business segments across the U.K., which will benefit the overall British economy.

Telefonica Chief Executive Officer, Jose Maria Alvarez-Pallete, said; “Combining O2’s number one mobile business with Virgin Media’s super-fast broadband network and entertainment services will be a game-changer in the U.K., 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 U.K.”

Mike Fries, Chief Executive Officer of Liberty Global, added; “We couldn’t be more excited about this combination. Virgin Media has redefined broadband and entertainment in the U.K. 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 U.K., always putting the customer first.

“With Virgin Media and O2 together, the future of convergence is here today. We’ve seen the benefit of FMC first-hand in Belgium and the Netherlands. When the power of 5G meets 1 gig broadband, U.K. consumers and businesses will never look back. We’re committed to this market and are right behind the Government’s digital and connectivity goals.”

The joint venture is expected to generate significant operating benefits, with estimated run-rate cost, capital expenditure and revenue synergies of £540 million on an annual basis by the fifth full year post closing, equivalent to a net present value of approximately £6.2 billion post tax and net of integration costs, as well as significant synergies from the accelerated usage of existing tax assets.

The vast majority of the benefits relate to demonstrable cost and capital expenditure synergies, with an annual run-rate of approximately £430 million out of which approximately 80% are expected to be achieved by the third full year after the closing.

In addition, the joint venture is expected to realise significant growth through cross-selling opportunities and scale, resulting in revenue synergies with an estimated annual run-rate of approximately £110 million on an annual basis.

To achieve these synergies, the joint venture expects to incur approximately £700 million of integration costs, most of which should be incurred in the first four years after the closing.

With extensive track records of delivering value creation, Liberty Global and Telefonica bring significant experience in the integration and execution of identified synergies in the context of in-country consolidations and convergence transactions across Europe and worldwide.

Merger Timetable

Liberty Global and Telefonica anticipate that closing of the transaction is expected to take place around the middle of 2021.

The transaction is subject to regulatory approval. Liberty Global and Telefonica have already undertaken preparatory work on the required competition filing and will formally request approval from the appropriate authority in due course. The transaction is also subject to a condition that the recapitalisation have occurred and other closing conditions customary for transactions of this type.

With respect to the upcoming U.K. spectrum auction, each party will operate as standalone entities and make independent decisions regarding strategy and participation. As such, each party will bear its own individual costs for the auction.

The transaction is not subject to Telefonica or Liberty Global shareholder approvals. Liberty Global’s Irish operations are not part of the transaction.

Joint Venture Management

The board will consist of eight members, four from each of Liberty Global and Telefonica. Mr. Fries, CEO of Liberty Global, and Mr. Alvarez-Pallette, CEO of Telefonica, will sit on the board. The post of Chairman will be held for alternating two-year periods by Liberty Global or Telefonica with Liberty Global holding the position first.

Each shareholder has the right to initiate an initial public offering of the JV after the third anniversary of the closing. The parties have agreed to restrictions on other transfers of interests of their shares in the JV until the fifth anniversary of closing. After the fifth anniversary, each shareholder will be able to initiate a sale of the entire JV to a third party, subject to a right of first offer in favour of the other shareholder.