Advertisement

Telecoms titans O2 and Virgin Media tie the knot

O2 and Virgin Media are set to merge and create a new company worth £31bn. What does this mean for the industry? Matthew Partridge reports

Virgin Media employee © Universal Images Group via Getty
A Virgin/O2 tie up could benefit shareholders © Getty

Telefonica and Liberty Global have agreed an “industry-defining deal”, say Rodrigo Orihuela and Thomas Seal on Bloomberg. They are creating Britain’s largest phone and internet operator by merging Telefonica’s 02 and Liberty’s Virgin Media to create a new company valued at £31bn. Both companies will have equal stakes in the venture, will name half of the board of directors, and can also appoint the firm’s chairman on a rotating two-year basis. Liberty will pay Telefonica a total of £8.2bn to reflect the difference in the current size of both companies.

Advertisement - Article continues below

The joint venture between Liberty, owner of Virgin Media, and O2 parent Telefonica may seem like an “odd pairing” given that Liberty is run by an “anti-establishment financial innovator” while Telefonica “sits at the centre of Spain’s corporate establishment”, says Christopher Williams in The Daily Telegraph. Still, the immediate cash payment will help Telefonica reduce its large debts, while both sides will benefit from the fact that the promised £540m in cost savings “should be readily achievable”. In the longer term, the new company should be well placed to benefit from the industry-wide trend toward converged services that “blend mobile and broadband”.

Advertisement
Advertisement - Article continues below

Not so fast, says Chris Nuttall in the Financial Times. It’s true that with the spread of 5G and fibre to the home, anyone able to combine wireless and fixed-line in a “seamless superfast future” will have an advantage. Nevertheless, creating “converged telecoms titans” is “no guarantee of success”. After all, BT was “five years ahead of the game” in the UK when it said it would buy mobile operator EE in 2015. But this hasn’t stopped its shares falling by 80% since, and it has just cancelled its dividend for the first time in 36 years.

Advertisement - Article continues below

Even if cost reduction means that the deal does prove to be a bonanza for shareholders, consumers are unlikely to see any benefits in terms of lower prices or better service, according to Nils Pratley in The Guardian. Far from stimulating competition by reshaping the industry, the joint venture between the “biggest cable owner” and the “biggest mobile operator” will “probably do the opposite” by cementing market shares. As a result, regulators should be on “high alert” either to block the deal or at least to extract “a few upfront benefits” for consumers in return for approval.

Competition concerns are unlikely to stop the deal, says Ingrid Lunden on TechCrunch. It’s true that Telefonica and Liberty Global have had previous merger efforts thwarted after regulators “put up flags over antitrust violations”. Competition concerns meant that Telefonica’s previous efforts to divest O2 in a merger with Three “went nowhere”. However, at present we are seeing regulators take a “different tack”. They aim to approve and clear a “backlog of deals” more rapidly in addition to giving them “more open-minded” treatment in order to “keep the economy turning”.

Advertisement
Advertisement

Recommended

Visit/517688/the-british-equity-market-is-shrinking
Stockmarkets

The British equity market is shrinking

British startups are abandoning public stockmarkets and turning to deep-pocketed Silicon Valley venture capitalists for their investment needs.
8 Nov 2019
Visit/511212/reasons-for-investors-to-be-bearish-but-stick-with-the-stockmarket-bulls
Stockmarkets

There are lots of reasons to be bearish – but you should stick with the bulls

There are plenty of reasons to be gloomy about the stockmarkets. But the trend remains up, says Dominic Frisby. And you don’t want to bet against the …
17 Jul 2019
Visit/510684/good-news-on-jobs-scares-stockmarkets
Economy

Good news on jobs scares US stockmarkets

June brought the best monthly US jobs growth of the year, but stockmarkets were not best pleased.
11 Jul 2019
Visit/510135/trade-war-ceasefire-boosts-stockmarkets
Economy

Trade-war ceasefire boosts stockmarkets

Stockmarkets sighed with relief after the G20 summit in Japan brought a handshake between Donald Trump and Xi Jinping.
4 Jul 2019

Most Popular

Visit/economy/inflation/601584/the-end-of-the-bond-bull-market-and-the-return-of-inflation
Inflation

The end of the bond bull market and the return of inflation

Central bank stimulus, surging post-lockdown demand and the end of the 40-year bond bull market. It all points to inflation, says John Stepek. Here’s …
30 Jun 2020
Visit/investments/commodities/gold/601587/bullish-gold-price-cup-and-handle-chart-pattern
Gold

This chart pattern could be extraordinarily bullish for gold

The mother of all patterns is developing in the gold charts, says Dominic Frisby. And if everything plays out well, gold could hit a price that invest…
1 Jul 2020
Visit/economy/global-economy/601579/how-pent-up-demand-could-drive-a-v-shaped-economic-recovery
Global Economy

How “pent-up demand” could drive a V-shaped economic recovery

“Pent-up demand” is usually a myth. But not this time. The Covid lockdown has created genuine pent-up demand, says Merryn Somerset Webb. That’s now be…
29 Jun 2020