Liberty Global and Telefónica have struck a landmark deal to combine their British operations O2 and Virgin Media in a £31.4bn agreement that will reshape the UK’s telecoms market.
The two companies announced the deal on Thursday after five months of negotiations between the Spanish telecoms company and the US group controlled by billionaire John Malone.
Under the terms of the agreement, the companies will have equal ownership of O2 and Virgin Media.
The deal will also reshape the British telecoms sector by uniting the country’s second-largest broadband network with the largest mobile network, which has 26m direct customers and 34m non-direct clients, via brands such as Tesco Mobile and business users. It would also force rivals Vodafone, Sky, Three and TalkTalk to compete with two much larger telecoms companies.
The agreement values O2 at £12.7bn and Virgin Media at £18.7bn, including their respective debts, the companies said in a statement on Thursday.
The two are committed to invest £10bn in the UK over the next five years. The deal, which will create a business with £11bn in revenue and 46m customer accounts across the combined mobile, broadband and pay-TV bases, is anticipated to close towards the middle of 2021.
The parent companies expect to achieve £540m worth of synergies by merging the businesses, through a combination stripping out costs and moving Virgin Media’s existing 3m mobile customers from EE on to O2’s network.
The deal, which was led by Mike Fries, chief executive of Liberty Global, and José María Álvarez-Pallete, chairman and chief executive of Telefónica, will create a stronger competitor to BT, which owns the EE network.
Mr Álvarez-Pallete said: “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.”
Mr Fries said combining the fixed and mobile networks of Virgin Media and O2 would help deliver on the British government’s ambition to raise UK broadband speeds. “With Virgin Media and O2 together, the future of convergence is here today,” he said.
The agreement will also see Telefónica receive £5.7bn in cash to help it reduce its heavy debt position. The Spanish group will also receive an equalising payment from Liberty Global of £2.5bn reflecting Virgin Media’s £11.3bn of debt.
Liberty Global will also take £1.4bn in cash after splitting out Virgin Media’s Irish business, which would not be included in the merger with O2
Vodafone had long been linked with a plan to combine its UK business with Virgin Media but has held back, despite merging with Liberty Global in the Netherlands and buying the cable company’s networks in Germany and eastern Europe last year. It also merged with rival Idea in India and could yet look to unsettle the O2 tie-up in the coming weeks, according to one person with knowledge of the company’s plans.
Telefónica has also been looking for a UK deal for a number of years. Its efforts have included trying to sell O2 to BT, agreeing a £10.3bn sale to mobile rival Three that was blocked by regulators and has attempted to launch an initial public offering of the network.
The Virgin Media deal represents the fourth time the business has changed hands. It was founded as Cellnet under BT before being demerged and relaunched as MMO2. Telefónica fought off competition from KPN, the Dutch telecoms company, to buy the mobile network in 2005 for nearly £18bn.
Backers of the deal between Liberty and Telefónica also justified it by pointing to the need to invest in expanding Virgin Media’s ultrafast broadband network and upgrading O2’s mobile services to 5G networks. Both businesses have suffered network issues in the weeks leading up to the merger.