Following on from extended media speculation, on the morning of May 7th 2020, it was announced that parent companies of Virgin Media and O2 were to merge their UK operations in a mega £31 Billion-pound deal.

The UK Telecommunications Market

This 50-50 joint venture would result in the creation of a leading fixed-mobile and internet provider in the UK. Currently, Virgin Media’s £11 billion revenue makes it the 3rd largest Internet provider in the UK with 20% market share, whilst O2 is the largest mobile phone provider with a 28% Market share. [1]

This merger would combine the 34 million-strong mobile phone customers of O2 and 5.3 million broadband, TV subscription and mobile users of Virgin Media, applying significant pressure to competitors Sky and BT.[2]

The new competitor will offer highly competitive bundles of TV, mobile and broadband packages, which will help establish their market position in the long run. Mike Fries, Chief Executive of Liberty Global, stated it was only “a matter of time” until the UK media and telecoms market were to see more convergence. Telefonica’s CEO José María Alvarez-Pallete described the UK as “one of the most attractive markets on Earth”, indicating that European investors are still interested in UK investments post-Brexit. This commitment of Investment clearly demonstrates the power of the U.K telecoms industry. [3]In addition, the industry is of strong economic value with £33.8 Billion in operator-reported revenue. Combining this with TV, audio visual and radio, the sector is valued at close to £50 Billion. [4] Dominating these industries will indeed be profitable for the merged company.

The Merger

The key driver of this merger is to create a viable and strong competitor in a market which had been strongly dominated by BT and Sky in recent years. BT’s £12.5 Billion-Pound deal in 2016 to acquire EE arguably initiated the thought process for a similar deal. In turn, this yielded an example of what can be achieved when two dominant telecommunications giants merge to create a platform offering a broader and more diverse service offerings, leading to strong synergies.

Backed by their core areas of expertise, the idea of product diversification was a strong motivator in this deal and closely aligns with Virgin Media’s expansion of their giga-ready network and O2’s 5G mobile network.

The newly-formed giant has plans to invest £10 Billion in areas including gigabit-speed broadband and 5G networks. This joint venture aspires to be the largest and fastest in the U.K. with customers expected to experience the highest quality of connectivity on offer, with the dual-benefit of using both current infrastructure networks.

Crucially, for the joint venture to receive approval from the Competition and Markets Authority (CMA), they will have to ensure their operations enable markets to remain competitive. The justification of creating more competition and consumer choice is likely to aid their proposal to merge. Furthermore, the companies hope to be a provider of services including big data, cloud and cybersecurity services. This will lead to sustainable competition in small, medium and large businesses in the UK, which is crucial in driving the UK towards its ambitious technological goals.

With an aim for the deal to be completed by mid 2021, the pathway and opportunity to float the venture on the UK stock market within three years is very likely. The promise is to “offer transparency of value and give people the chance to own part of the national champion.” [5]   Based on experts’ insight, there seems to be virtually no grounds towards blocking this merger.

5 years prior, Telefonica had agreed to sell O2 to the owner of Three for £10.2 Billion; however, it was famously blocked by the European Commission citing concerns that it would have only left three major mobile phone operators. Ironically, just one month prior to the announcement of the O2 and Virgin Media merger, the O2 and Three deal block was overturned, leaving questions as to the rationale and procedure used to monitor transactions such as the above.  [6]


Telefonica have experienced a difficult 5-year period with their share price collapsing from around €13.5 per share in 2015 to €4.21 per share at the time of the announcement. Across the Atlantic, NASDAQ-listed Liberty Global have also experienced poor financial fortunes with their shares tumbling from $50 per share to $22 per share over the last 5 years, emphasising the importance of this merger. Primarily, this is necessary for survival and additionally as a way of growing in the medium to long term.

Synergies1 are promising, with the hope that the joint venture can deliver savings as high as £6.2 Billionafter integration costs, and equivalent to cost, capex (Capital Expenditure) and revenue benefits of £540 million. The sources of capex synergies are expected to originate from use of existing infrastructure in order to provide joint services at a lower cost compared to individual capabilities. Furthermore, a combination of regional and national networks and reduction in combined marketing expenses will result in these desired savings.

Additionally, it is hoped the joint venture can lead to significant growth via cross-selling2 opportunities, which in turn creates further savings. The merger will include a series of recapitalisation financings3 before arriving at its target closing net leverage ratio4 for the joint venture of 5.0x, approximately £18 billion of long-term debt.

Net new proceeds from the recapitalisations are aimed to be approximately £6 billion. After considering the recapitalisations, Telefonica is expected to receive £5.7 billion in total proceeds from the transaction, with Liberty Global expected to receive £1.4 billion in total. This includes approximately £800 million from the recapitalisation of its retained and fully owned Virgin Media Ireland business [6]


Moving forward, the next year will be a challenging period for both companies as they smooth out any complications, ensuring this joint venture can primarily receive approval. More critically, the integration process must be smooth, especially in the present COVID-19 era.

Leadership of this new joint venture will be agreed prior to the completion of the deal and the board will consist of a 50-50 split of employees from Liberty Global and Telefonica, including the CEOs of both firms. Crucially, until the fifth anniversary of completion, no shareholder can initiate a sale of the joint venture to a 3rd party, highlighting the dual commitment to this deal for the foreseeable future.

The UK’s need for fast broadband and mobile connection is imperative and a critical feature of the government’s ambitious promise as Britain drives towards technological advancement to future-proof the economy. There is a huge need for stronger mobile infrastructure and the demand for this joint venture is likely to lead to a successful merger.

Opposition to this joint venture will be fierce, especially from Sky and BT who are at risk of losing market share and dominance. Good or bad, this deal will be ground-breaking for the UK Telecommunications Sector and one that the market and consumers will be monitoring closely.


1 Synergy is the concept that the combined value and performance of two companies will be greater than the sum of the separate individual parts.

2 To cross-sell is to sell related or complementary products to an existing customer.

3 Recapitalisation is the process of restructuring a company’s debt and equity mixture, often to make a company’s capital structure more stable.

4 A leverage ratio is any one of several financial measurements that assesses the ability of a company to meet its financial obligations.

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