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Telefónica and Liberty Global to merge O2 and Virgin Media

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Liberty Global and Telefónica are in talks to merge its UK companies, Virgin Media and O2.

Should the deal go ahead, the two companies will form a new joint venture with each party owning a 50% share in the new entity.

In addition, sources claim that Liberty Global would be made to make a payment to Telefónica to balance out the deal.

Industry experts say that the new business could create strong competitor to incumbent operator BT, bringing together O2’s 34 million mobile customers and Virgin Media’s 5.3 million broadband, pay-TV and mobile subscribers.

Additionally, the deal could also create a new competitor to Comcast-owned Sky in the pay-TV market.

Speaking exclusively to Capacity, Paolo Pescatore, tech, media & telco analyst at PP Foresight, said: “This is an intriguing move. For sure, it is more likely to appease regulators than two mobile operators coming together.”

“Also, let’s not forget the parents of both companies have been keen to offload these assets for a while. Therefore, there is more to this than simply convergence and competing with BT and Sky.”

Pescatore of course refers to back in 2015 when Telefónica was blocked from selling O2 to Three, CK Hutchison’s mobile arm, for an agreed amount of £10.25 billion.

While Liberty Global has offloading much of its European operations, for example selling its cable networks in Germany and central Europe to Vodafone for $22bn (£17.6bn) in 2019.

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Prior to this, in 2016 the company also merged its Dutch operations with Vodafone’s.

Though Pescatore agrees the new entity will create a much stronger competitor, he has doubts about its ability to take on the likes of BT and Sky.

“While, the new entity will be far stronger, I’m not sure it will be able to compete with BT and Sky. Beforehand a few obstacles need to be overcome, valuation of both companies and the existing MVNO agreements (include Virgin Media with Vodafone, O2 with Sky),” he says.

“A major sticking point will be the valuation. Virgin Media remains the crown jewel in Liberty Global’s portfolio, but also a problem child.”

“Moves to divest other assets shows a desire to leave Europe by maximising the value of each asset. A stumbling block in discussions with Vodafone. Similar to O2, Telefonica needs much needed cash to reduce its debt position.”

Pescatore has long foreseen Liberty’s plan of merging with a UK operator to build out its need for convergence and stronger market position. During Liberty Global Q1 2019 results, he commented:

“Given the renewed push towards convergence and importance of owning fixed and mobile assets (due to 5G and more), it is feasible that it might acquire or merge with a UK mobile operator.”

Looking ahead he says that converged network and services are “the next battle ground in the UK”.

“Virgin Media was one of the pioneers in this area but has been let down without a mobile network, late to market in 4G and struggling TV business. Whereas O2 sole’s focus on mobile and championing consumers will run out of steam at some point.”

Telefónica confirmed the report in a statement earlier today saying “The process started between both parties is in negotiation phase, with no guarantee, at this point, precise terms or its probability of success”.

Liberty Global has yet to confirm these reports.

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