O2 and Virgin Media merger to create £10bn in UK investment

The converged platform is expected to deliver synergies valued at £6.2bn

The merger of Virgin Media and O2 will create £10bn in UK investment over the next five years, the companies have promised.

The news comes days after it was revealed that Telefonica, which owns O2, and Virgin Media’s parent company Liberty Global were planning to challenge BT’s dominance in the telecommunications sector by merging their companies in a 50-50 joint venture.

According to a joint statement released by the two companies, O2 is “to be transferred into the joint venture on a debt-free basis, while Virgin Media to be contributed with £11.3bn of net debt and debt-like items”. O2 is to be valued at £12.7bn, while Virgin Media at £18.7bn. The converged platform is expected to deliver synergies valued at £6.2bn.

However, there are no details as yet as to how or where the £10 billion investment will be spent.

Kester Mann, Consumer and Connectivity director at CCS Insight, called the merger of O2 and Virgin Media “a natural fit”.

“This blockbuster merger will transform the UK telecoms landscape and create a powerful new converged provider to rival BT. The UK has remained ripe for further consolidation since BT’s acquisition of EE in 2016, although the timing of the announcement – during a global pandemic – was unexpected,” he said.

According to Mann, the deal is beneficial for both companies as “each side gains crucial assets it severely lacks: a mobile network for Virgin and a fixed-line arm for O2”.

“We think this deal will trigger a ripple effect on the UK market: Vodafone, Three, Sky and TalkTalk will all be assessing their positions and further deal-making can’t be ruled out," Mann added. "For O2, this is a major shift in direction as its CEO – Mark Evans – has regularly played down the market for bundled services in the UK. This suggests that Telefonica executives were the driving force behind the deal.

“For Virgin Media, the deal reflects a new-found determination to take on BT, evident since Lutz Schuler became CEO less than a year ago, and will finally kick-start a convergent strategy that has struggled to gain genuine traction."

The company’s chairman and CEO, José María Álvarez-Pallete, said that “it is too soon to assess the extent of the effects of the pandemic, but we have several levers to mitigate potential negative impacts”.

“The resilience and flexibility of our business model and the strength of our company, allow us to maintain an attractive dividend for our shareholders, of €0.40 per share. We continue to work on our five strategic decisions announced at the end of 2019, to make our company even more resilient in the future.”

Revenues from the company's four key operators had grown 1.5% in the UK.

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