CMA approval for VMO2, CityFibre takeover ‘unlikely’

CMA approval for VMO2, CityFibre takeover ‘unlikely’

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it is "unlikely" that the Competition and Markets Authority (CMA) approve a Virgin Media O2 (VMO2) takeover of CityFibre according to Jerry Dellis, equity analyst at Jefferies Equity Research.

On Saturday, it was reported by the Telegraph that initial talks have taken place between Mike Fries, CEO of Liberty Global and Greg Mesch, CEO of CityFibre over and acquisition that could be worth £3 billion.

According to the research firm, CityFibre is “pivotal to the policy goal of network competition” as Ofcom is seeking to establish alt-nets as enduring competitors against Openreach and VMO2.

“Ofcom says that an endgame of three competing networks across one-third of UK premises would be acceptable." Yet it also notes that a VMO2-CityFibre combination would eliminate 40% of today’s alt-net presence (excluding the minor players).

“That would be a serious matter for Ofcom.”

The research adds that the CMA is unlikely to see the consumer benefits in a VMO2-CityFibre combination.

“A VMO2-CityFibre combination would appear to threaten the regulatory objective of network competition providing choice for ISPs, leading to better outcomes for consumers,” it said.

“With a back-book comprising millions of customers that have been subject to multiple years of retail price increases, we question what incentive VMO2 has to compete down wholesale pricing.”

Healthy competition?

The current UK telco landscape currently consists of more than 150 altnets, and as a result “one could argue that this suggests that competition is healthy” according to Paolo Pescatore, TMT analyst at PP Foresight.

“On the contrary, more so looking at Ofcom’s change of heart with Equinox 2 towards rival infrastructure suppliers like VMO2 and altnets that prices are too low, squeezing them out of the market,” he says.

“In theory, by offering lower wholesale pricing this saving should be passed onto consumers resulting in lower fibre broadband packages.”

Pescatore thinks that rivals will feel that Openreach is trying to use its market dominance by locking in providers for longer and if so this will squeeze their own margins, making it harder to roll out their networks and compete at scale.

“However, Openreach wants to have long term certainty as it invests in building out a fibre network in the UK.”

Pescatore says the market cannot support all players as there are “too many chasing too few pounds”.

Moving forward, he says, VMO2 will be linked with all the altnets who are slowing down rollout, retrenching to focus on local areas and forging closer tie-ups with each other.

“Significant overbuild, macro-economic uncertainty, investment caps and escalating costs with no immediate returns in the short-term means all roads are leading to consolidation.”

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