O2 and Virgin Media in talks to merge

Firms look to create a formidable opposition to BT's dominance in the sector

Telefonica, which owns O2, and Virgin Media’s parent company Liberty Global are in talks of a UK-based merger in order to create a formidable opposition to BT’s dominance in the sector.

Negotiations to merge the two network companies have been outlined in a Spanish stock market filing, according to Reuters, although there’s no guarantee at this stage as to how these talks will end.

Any such move would radically change the nature of the telecoms market in the UK, as BT would suddenly find itself competing with a rival comparable to itself. 

While Virgin Media currently provides a direct alternative to BT’s full-fibre infrastructure, the addition of O2’s mobile network business would bolster its armoury to match BT’s given the latter’s ownership of EE.

The move feels like a “bolt from the blue”, according to tech, media and telco analyst with PP Foresight Paolo Pescatore, although both parent companies have been keen to offload these assets for a while. Moreover, although a merger may produce an entity capable of competing with the likes of BT and Sky, a set of obstacles would first need to be overcome.

“This is an intriguing move. For sure, it is more likely to appease regulators than two mobile operators coming together,” he told IT Pro.

“While the new entity will be far stronger, I’m not sure it will be able to compete with BT and Sky. Beforehand, a few obstacles need to be overcome such as the valuation of both companies and the existing MVNO agreements (which include Virgin Media with Vodafone, O2 with Sky). 

“The major sticking point will be the valuation. Virgin Media remains the crown jewels in Liberty Global’s portfolio, but also a problem child. Moves to divest other assets shows a desire to leave Europe by maximising the value of each asset. This proves a stumbling block in discussions with Vodafone. Similar to O2, has Telefonica needs much-needed cash to reduce its debt position.”

He added this is likely to be the next battleground in the UK. Virgin Media was one of the pioneers in telecoms, although it’s been let down because the company has found itself without its own mobile network, and was also late to the market in 4G, not to mention its struggling TV business. 

News of these discussions has emerged just as O2 warned the network regulator Ofcom that it plans to challenge the format for the sale of the spectrum for 5G networks. 

The spectrum sale, initially set to take place during the latter half of the year, had faced an initial six-month delay due to the coronavirus pandemic. The judicial review threatened by O2, however, could delay the sale of frequencies capable of carrying 5G waves significantly, according to the Financial Times (FT)

The dispute centres on the nature of the auction, with O2 preferring the spectrum to be sold in a contiguous manner with overlapping wavelengths, as opposed to Ofcom’s current plan to slice it up and sell of fragmented portions.

Virgin Media declined to comment on the merger, while O2 had not yet responded to our request at the time of publication.

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