Telecommunications

Virgin Media and O2 owners confirm £31bn mega-merger in UK

The owners of Virgin Media and O2 have confirmed a £31bn merger deal to create a new “national champion” to challenge BT and Sky in the UK.

Liberty Global, which owns the UK’s largest cable company Virgin, and Telefónica, which owns Britain’s biggest mobile operator O2, are to merge their UK operations in a new 50-50 joint venture.

Liberty Global is also ITV’s biggest shareholder, with a 10% stake, and owns half of All3Media, the production group that makes shows including Liar, Fleabag and Hollyoaks.

The new company, which will challenge BT and Sky by offering consumers competitive bundles of TV, mobile and broadband packages, will have 46 million customers and £11bn in revenue.

Mike Fries, the chief executive of Liberty Global, said it had been only “a matter of time” until there was more convergence in the highly competitive UK media and telecoms market.

“BT and EE together are a powerful combination in our minds,” he said, referring to BT’s £12.5bn deal to buy the mobile company in 2016. “Our rationale was that it was just a matter of time, convergence has been slower in this market. With Virgin Media and O2 together, the future of convergence is here today.”

The new company will invest £10bn in areas including gigabit-speed broadband and 5G networks.

“The UK is one of the most attractive markets on Earth,” said José María Alvarez-Pallete, the chief executive of Telefónica. “Even considering Brexit, we have been investing heavily in the UK. It is the right time to commit to the future of the UK by building this value proposition.”

Under the deal, which is expected to complete in the middle of next year, there is an option to perhaps float the venture on the UK stock market in three years.

“We are both coming to the joint venture with the expectation we will remain partners,” Alvarez-Pallete said. “We don’t come into this with the expectation that we will turn right or left at a certain point of time. If a listing were to come down the road, it can provide a transparency of value and give people the chance to own part of a national champion.”

Philip Jansen, the chief executive of BT, said the emergence of a new power player in the UK market would not make BT speed up its own investment plans.

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“We are not going to go any faster,” he said. “We have a comprehensive five-year plan. This deal is not a surprise, I think the industry needs consolidation. It follows our strategy four years ago [buying EE]. Competition is good, it drives innovation.”

The new joint venture will be overseen by an eight-strong board of directors, four each from Liberty Global and Telefónica, with the chairman rotating every two years between the two companies. Liberty Global’s Fries will be the first chairman.

The deal will include recapitalisations under which Telefonica will receive £5.7bn in proceeds and Liberty Global £1.4bn. The new venture will be laden with £18bn in long-term debt.

Vodafone, which has previously held talks with Liberty Global about a similar UK tie-up, could yet look to make a counter offer.