O2 UK and Virgin Media merger plans confirmed

7 May 2020

Just days after it was announced that British mobile network operator (MNO) O2 UK and local multi-play service provider Virgin Media were in discussions regarding a possible merger, the duo’s parent companies have now confirmed a deal aimed at creating ‘the leading fixed-mobile provider in [the UK]’. In a press release outlining the plan, O2 UK noted that its parent company, Spain-based Telefonica, and Virgin Media parent Liberty Global have inked an agreement to merge their operating businesses in the UK to form a 50:50 joint venture (JV). It is claimed that the combination of the two service providers will create a nationwide integrated communications provider with annual revenue of around GBP11 billion (USD13.6 billion) and more than 46 million pay-TV, fixed broadband and mobile subscribers. Further, the companies have said the JV initiatve will deliver ‘substantial’ synergies, valued at GBP6.2 billion on a net present value basis after integration costs, and equivalent to cost, CAPEX and revenue benefits of GBP540 million on an annual basis by the fifth full year post-closing.

In terms of the proposed transaction, this will reportedly include ‘a series of recapitalisation financings prior to closing to reach its target closing net leverage ratio for the JV of 5.0x, or approximately GBP18 billion of long-term debt’, with net new proceeds from the recapitalisations expected to be around GBP6 billion. After accounting for recapitalisations, Telefonica is expected to receive GBP5.7 billion in total proceeds from the transaction, while Liberty Global will collect GBP1.4 billion, including approximately GBP800 million from the recapitalisation of its retained and 100%-owned Virgin Media Ireland business. These transaction proceeds will be determined based on: equalisation payments to take into account the relative valuation of the two businesses; and the proceeds generated from the recapitalisation transactions. In respect of the equalisation payments, based upon the enterprise value of each business and after deducting debt and debt-like items, Liberty Global will make a cash payment to Telefonica of GBP2.5 billion. It was noted, however, that this payment will be offset by receipt of proceeds from the aforementioned recapitalisations, ‘such that at closing Liberty Global receives cash proceeds from the transaction’.

The merger subject to regulatory approval, with Liberty Global and Telefonica anticipating the closing of the transaction ‘around the middle of 2021’. Here, the parent companies have already undertaken preparatory work on the required competition filing, with a formal request for approval from the appropriate authority expected ‘in due course’. Meanwhile, the transaction is also said to be subject to a condition that the recapitalisations have occurred, as well as ‘other closing conditions customary for transactions of this type’.

One final confirmation was that, with respect to the UK’s upcoming spectrum auction, each party will operate as standalone entities and ‘make independent decisions regarding strategy and participation’.

United Kingdom, Liberty Global (incl. LGI), O2 UK, Telefonica, Virgin Media, Virgin Media Ireland