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

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.

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”.

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.

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”.

Recommended

Imperial Brands has an 8.3% yield – but what’s the catch?
Share tips

Imperial Brands has an 8.3% yield – but what’s the catch?

Tobacco company Imperial Brands boasts an impressive dividend yield, and the shares look cheap. But investors should beware, says Rupert Hargreaves. H…
20 May 2022
What's behind Sri Lanka’s crippling debt crisis?
Emerging markets

What's behind Sri Lanka’s crippling debt crisis?

Sri Lanka has been hit by a triple whammy of economic shocks and has gone to the IMF for a bailout. It may just be the first domino to fall in a globa…
20 May 2022
Investing in drugmakers: uncommon profits from curing rare diseases
Share tips

Investing in drugmakers: uncommon profits from curing rare diseases

Treatments for medical conditions with only a small number of sufferers can still be very attractive for pharmaceutical companies and investors becaus…
20 May 2022
Share tips of the week – 20 May
Share tips

Share tips of the week – 20 May

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
20 May 2022

Most Popular

The ten highest dividend yields in the FTSE 100
Income investing

The ten highest dividend yields in the FTSE 100

Rupert Hargreaves looks at the FTSE 100’s top yielding stocks for income investors to consider.
18 May 2022
Aviva: a share for income investors to tuck away
Share tips

Aviva: a share for income investors to tuck away

Insurance giant Aviva is one of the highest yielding stocks in the FTSE 100 – and it’s cheap, too, making it a tempting target for income investors. R…
18 May 2022
Inflation is now at its highest since 1982 – is this the peak?
Inflation

Inflation is now at its highest since 1982 – is this the peak?

At 9%, UK inflation is at its highest for 40 years – and it’s not going anywhere soon, says John Stepek. That means you need to be much more active a…
18 May 2022