Major UK telecom shakeup…O2’s ownership odyssey continues, with confirmation it is to merge with Virgin Media to take on the BT/EE juggernaut
Virgin Media looks set to become a genuine quad-play communications provider in the UK market with the news that it is to merge with mobile operator O2.
The 50-50 joint venture will combine Virgin Media’s broadband, TV, mobile and landline services with the mobile operations of O2, which is the country’s largest mobile platform.
Earlier this O2 filed a legal challenge to a planned additional 5G spectrum auction, potentially creating a delay to the UK’s rollout of 5G services.
Virgin Media is owned by American cable giant Liberty Global, which in May 2018 sold most of its European assets to Vodafone.
However the one European asset it held onto was its UK operation, and now the combination combination of Virgin Media and O2, will result in a nationwide integrated communications provider with over 46 million video, broadband and mobile subscribers, as well as and £11 billion of revenue.
It should be remembered that until now, Virgin Mobile UK had for years used the EE mobile network under its Mobile Virtual Network Operator (MVNO) strategy.
That was until November 2019, when Virgin Mobile signed a MVNO deal with Vodafone. This arrangement with Vodafone will be terminated.
For O2 the move into a joint venture is the latest development of its ownership odyssey.
O2 (or Cellnet) was originally by both BT and Securicor in the 1990s, before it was spun out of BT in the early 2000s, and was then acquired by Spanish incumbent Telefonica in 2006.
According to the announcement, the “combination creates a stronger fixed and mobile competitor in the UK market, supporting the expansion of Virgin Media’s giga-ready network and O2’s 5G mobile deployment for the benefit of consumers, businesses and the public sector.”
The two firms said their fully converged platform will allow it invest £10 billion in the UK over the next five years, helped by the “substantial synergies valued at £6.2 billion.”
Prior to the acquisition O2 had been valued at £12.7 billion and Virgin Media valued at £18.7billion. O2 will be transferred into the joint venture on a debt-free basis, while Virgin Media is to be contributed with £11.3 billion of net debt and debt-like items.
The transaction is expected to close around the middle of 2021 and is subject to regulatory approvals and other customary closing conditions.
“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,” explained Telefonica CEO Jose Maria Alvarez-Pallete.
“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,” he added. “This is a proud and exciting moment for our organisations, as we create a leading integrated communications provider in the UK.”
There was similar sentiment expressed by the boss of Liberty Global.
“We couldn’t be more excited about this combination,” said Liberty Global CEO Mike Fries. “Virgin Media has redefined broadband and entertainment in the UK with lightning fast speeds and the most innovative video platform. And O2 is widely recognized as the most reliable and admired mobile operator in the UK, always putting the customer first.”
“With Virgin Media and O2 together, the future of convergence is here today,” said Fries. “We’ve seen the benefit of FMC first-hand in Belgium and the Netherlands. When the power of 5G meets 1 gig broadband, UK consumers and businesses will never look back. We’re committed to this market and are right behind the Government’s digital and connectivity goals.”
Experts in the sector were quick to point out that the Virgin Media and O2 merge with present BT (which owns EE) with a notable challenge going forward.
“The merger of O2 and Virgin Media means that BT faces some serious competition in the coming years,” noted Matt Powell, editor at Broadband Genie.
“Virgin will gain access to a nationwide wireless network to complement its fibre broadband services, while O2 can once again offer fixed-line internet for the first time since it sold its broadband business to Sky,” he said.
“While market convergence is not always a positive for customers, the UK still has a well regulated and healthy broadband market with lots of smaller providers filling the gaps left by the big players,” Powell said.
“This merger will put pressure on the bigger providers and could mean that customers benefit from even better deals and services,” he concluded.
Another expert agreed that this deal will result in a bigger challenge for BT, and that the joint venture should drop the Virgin Media brand, and use the O2 name going forward.
“This blockbuster merger will transform the UK telecoms landscape and create a powerful new converged provider to rival BT,” noted Kester Mann, director of consumer and connectivity at CCS Insight.
“The UK has remained ripe for further consolidation since BT’s acquisition of EE in 2016, although the timing of the announcement – during a global pandemic – was unexpected,” said Mann.
“A combination of O2 and Virgin Media is a natural fit,” he added. “Each side gains crucial assets it severely lacks: a mobile network for Virgin and a fixed-line arm for O2.”
“We expect that regulatory approval is unlikely to be an issue as the deal does not create a significantly stronger player in either the fixed-line or mobile markets,” said Mann. “The greatest challenges will arise after the deal completes. In particular, the new unit will need to dig deep to fund the costly expansion of cable and 5G services throughout the UK.”
“In the long run, we believe it would be better for the JV to retain the O2 brand at the expense of Virgin Media,” said Mann. “Both have a strong presence, but O2’s respected customer service, highly loyal customers and sponsorship of the O2 arena mean it is impossible to drop. A multi-brand approach serves only to duplicate costs and risks confusing customers.”
“Vodafone UK appears the biggest loser as the deal lays bare its weak position in the market for converged services,” noted Mann. “It also looks certain to scupper its virtual network partnership struck with Virgin Media in 2019.
“We think this deal will trigger a ripple effect on the UK market: Vodafone, Three, Sky and TalkTalk will all be assessing their positions and further deal-making can’t be ruled out,” said Mann.
“For O2, this is a major shift in direction as its CEO – Mark Evans – has regularly played down the market for bundled services in the UK,” said Mann. “This suggests that Telefonica executives were the driving force behind the deal.”
“For Virgin Media, the deal reflects a new-found determination to take on BT, evident since Lutz Schuler became CEO less than a year ago, and will finally kick-start a convergent strategy that has struggled to gain genuine traction,” he concluded.
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