Communications consolidation: O2 and Virgin Media in merger talks

Monday 4th May 2020

Last week, Bloomberg first reported that Telefonica – the Spanish telecommunications company that owns O2 – was in talks with Virgin Media’s owner Liberty Global to merge their UK telecoms and media businesses.

Telefonica has now confirmed that they are indeed in such talks with Liberty Global. O2’s owner made the confirmation in a communication to Spain’s National Securities Market Commission and stressed that talks were in the “negotiation phase”, and that there was no guarantee that a deal will be reached.

If an agreement can be reached, though, the transaction would be transformative not just for the two companies, but also for the wider telecoms and media sector in the UK. The transaction could be structured as an acquisition, and that is certainly possible for Liberty Global – whose last accounts indicate the company holds over $7 billion in cash. However, Reuters reported sources familiar with the matter stating that talks are currently centred on the option of an equal joint venture. In any case, Telefonica should still be able to extract some cash from the deal using that structure – with the Financial Times reporting a source stating that an equal joint venture would likely see Liberty Global make a payment to Telefonica to facilitate that 50:50 interest in the joint venture. Either option would be welcome for the Spanish telecoms company, which has been highly indebted for several years.

O2 is known in the UK primarily as a mobile phone network operator. It is the UK’s largest mobile phone operator – with approximately 34 million users. In addition to their own O2 brand services, O2 also provide the mobile network for services from Giffgaff, Tesco Mobile and Sky Mobile. Virgin Media is perhaps most well-known for its cable television, landline telephone and broadband offering. Virgin Media is therefore an internet service provider (ISP), as well as an operator of landline telephone and cable television services.

A tie-up between the two could therefore enable a single, more consolidated offering of packages including cable television, broadband and mobile services. Whilst Virgin Media does have a mobile phone provider subsidiary – Virgin Mobile – that mobile company is a Mobile Virtual Network Operator (MVNO), meaning that it does not own the network communications infrastructure through which it provides mobile services. Instead, Virgin Mobile has a contract for access to another operator’s mobile network. Virgin can then market its own services, which are delivered through that other operator’s infrastructure.

Virgin Mobile was a pioneer of the MVNO model – it became the first such operator in the world upon its creation in 1999. Currently, Virgin Mobile uses the network of mobile operator EE – a subsidiary of BT Group. This is a significant contract – said to be worth about £200 million per year in revenue to BT.

This relationship between EE (and its predecessors) and Virgin Mobile has stood for 20 years. However, in November last year, Virgin announced (in a significant blow to BT) that the relationship was to be ended from late 2021 – with the MVNO signing a new five-year agreement to use the network of Vodafone. In addition to ending the Virgin Mobile-EE relationship, the deal marked a significant step for Vodafone, which had previously avoided entering into such arrangements with MVNOs.

Practice area focus: commercial contracts

A deal between Virgin Media and O2 could be a significant setback for Vodafone – with whom Virgin had signed a five-year MVNO deal for the Virgin Mobile platform last year. With O2 being a mobile network operator, a deal with Virgin would almost certainly see the O2 network become the platform for Virgin Mobile going forward.

It remains to be seen, if the O2 deal goes ahead, what action Vodafone may take against Virgin. Much of this will come down to the terms of the MVNO contract agreed last year. The financial damage that this may do to Vodafone will only be clear, as the Evening Standard notes, once it is known what compensation Vodafone may be able to get from Virgin Media and Liberty Global for reneging on the November 2019 agreement.

Practice area focus: competition/antitrust

BT already suffered a blow when Virgin switched MVNO contracts away from their EE subsidiary last year, but the O2-Virgin Media deal could have a more profound impact on BT.

Presently, BT is an ISP, television provider, landline phone network operator and – through its EE subsidiary – a mobile network operator (the second largest in the UK). This broad offering allows BT to offer packages to customers with a more consolidated offering of telecoms and media services than virtually any other UK provider. A tie-up between Virgin Media and O2 would, for the first time in the UK, offer a real challenger to BT in that context.

The O2-Virgin Media deal, therefore, could present some interesting issues of competition and antitrust law. If there were to be some regulatory backlash at the deal, it would not be the first time in the UK telecoms and media sector. In 2016, the EU competition authorities at the European Commission blocked a planned £10 billion takeover of Telefonica’s O2 by Hong Kong-based CK Hutchison – the owner of UK mobile network Three.

The blocked acquisition of O2 in 2016 would have been a consolidation of two mobile network companies. O2 and Virgin Media would perhaps be more complementary joint venture partners – the former being a mobile network operator, and the latter being an ISP, MVNO, cable television and landline telephone operator. One might argue that the joint businesses could offer competitive packages of services to consumers that would challenge the current offering from dominant BT. It is virtually certain, however, that any O2-Virgin Media deal would receive scrutiny from competition authorities.