O2 and Virgin Media have announced a billion-pound mega merger to form a single UK communications giant capable of offering converged services that combine fixed and mobile connectivity.
As rumoured earlier this week, parent companies Telefonica and Liberty Global have agreed to combine O2’s 4G and 5G infrastructure with Virgin Media’s ultrafast cable network into a joint-venture worth in excess of £31 billion.
O2 currently has 34.5 million users on its network, a figure which includes mobile virtual network operators (MVNOs) such as Tesco Mobile, while Virgin Media has more than 5 million subscribers. The combined customer base immediately propels the merged entity into the realms of Europe’s largest telecoms firms.
The potential for converged services is significant, with Telefonica and Liberty Global promising to invest £10 billion over the next five years, while consolidation will also result in £6.2 billion in savings.
It is unclear whether one or both brands will be used by the combined entity, but it will be better placed to compete with BT, which has prioritised convergence in recent years with the acquisition of EE and investments in 5G and fibre infrastructure.
Although Virgin Media has a Mobile Virtual Network Operator (MVNO) it has never had a mobile network. Similarly, O2 lacks a fixed network. Convergence will allow for the development of new consumer and businesses services that take advantage of multiple communications technologies.
“We are creating a strong competitor with significant scale and financial strength to invest in UK digital infrastructure and give millions of consumer, business and public sector customers more choice and value,” said Jose Maria Alvarez-Pallete, Telefonica CEO. “ This is a proud and exciting moment for our organisations, as we create a leading integrated communications provider in the UK.”
“With Virgin Media and O2 together, the future of convergence is here today,” added Mike Fries, Liberty Global CEO. “We’ve seen the benefit of [Fixed Mobile Convergence] first-hand in Belgium and the Netherlands. When the power of 5G meets 1 gig broadband, U.K. consumers and businesses will never look back. We’re committed to this market and are right behind the Government’s digital and connectivity goals.”
Telefonica came close to selling O2 to Three’s parent company CK Hutchison in 2015. A £10.25 billion deal to merge the two operators was agreed but the European Commission blocked the move due to competition concerns. The combination of O2 and Three would have resulted in the creation of the UK’s largest mobile operator and reduced the number of players from four to three. This was unpalatable for the EC which feared innovation would decrease and prices would rise.
O2 has performed well for Telefonica in the intervening years, with Telefonica looking towards an IPO before the merger proposal came through. Virgin Media was first linked with a takeover of O2 in the immediate wake of the collapsed merger attempt.
The deal is set to be closed next year, subject to regulatory clearance from competitions authorities. Given O2 and Virgin Media have complementary networks, they will hope the transaction is viewed upon favourably.