Telefónica reaches agreement with Liberty for the merger of O2 and Virgin Media

Telefónica has closed the most important transaction since José María Álvarez-Pallete became president of the Spanish company. It is the merger of its British subsidiary O2 with Virgin Media, the UK division of Liberty Global, the group of businessman John Malone.

This strategic corporate movement, the most important worldwide since the beginning of the health crisis caused by the coronavirus pandemic, will change the scenario of the telecommunications sector in the United Kingdom and threatens BT's supremacy in the British telecoms scene, to compete with other relevant actors in the scene such as Vodafone. 

Telefónica and Liberty Global will each have a 50% stake in the resulting subsidiary, which is coming to occupy a very important position in the British and global market. The operation is valued at 35.8 billion euros, including debt, and was confirmed just a few hours ago by the National Securities Market Commission (CNMV).

Following the agreement, Telefónica will receive around 6.5 billion euros, including a compensation payment of just over 3 billion euros. The Spanish company will reduce its debt by around 6.5 billion euros, when at the end of the first quarter of 2020 it exceeded 38 billion euros. Meanwhile, Liberty Global will receive 1.4 billion pounds from its subsidiary (almost 1.6 billion euros). O2 and Virgin Media expect to achieve synergies with a net present value of £6.2 billion (just over 7 billion euros).

O2 gives Telefónica a relevant position in one of its key markets, although strong competition forces corporate operations to provide synergies, hence the agreement with Virgin Media. It tried previously with the Hong Kong teleco Hutchison, but the European Union's competition authorities backed out of the transaction. 

The operation has finally taken shape in the form of a joint venture, with power shared equally. Although both O2 and Virgin Media have a similar value, the latter has the highest debt, so Telefónica benefits in this case from the contribution of Liberty Global. 

Experts highlight the strategic consequences, taking into account that both groups are complementary in several areas. O2 is basically a mobile operator, which needs to make significant investments in the development of 5G technology, while Virgin is a cable company, which would facilitate the deployments of Telefónica's British division. 

And since the operators' strategy is to offer as many features as possible to customers, the resulting company will improve its position in the market, competing at the highest level with BT; while Vodafone is more focused on the mobile section and Sky and TalkTalk on broadband.

In the information submitted to the CNMV, Telefónica indicates that the transaction will result in an integrated telecommunications provider in the United Kingdom with over 46.5 million video, broadband and mobile connectivity subscribers and revenues of approximately £11 billion (about EUR 12.5 billion). Both companies stressed that "the UK market will benefit from the scale and complementary expertise of both partners, providing the joint venture with a range of services after the completion of the transaction", which was also stated by the company led by Álvarez-Pallete in its communication to the Securities and Exchange Commission. "This transaction is totally aligned with the strategy of the new Telefónica focused on improving its positioning in its main markets," said the Spanish operator.