VirGIANT: Virgin-O2 mega merger deal agreed

May 16, 2020

2 min read

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What's going on here?

Virgin and O2 have announced a merger that would create a £31bn telecoms giant.

What does this mean?

Liberty Global and Telefonica, the respective parent companies of Virgin Media and O2, have agreed to a 50/50 joint venture deal to consolidate their businesses after 5 months of negotiations. The deal would have a huge impact on the British telecoms sector, combining O2’s largest mobile network, which has 34m users, with Virgin’s second-largest broadband network, which has 5.3m users from its broadband, pay-TV, and mobile services. The firms plan to invest £10bn in the UK in the next 5 years to expand full fibre broadband and 5G services. The combination will allow Virgin and O2 to challenge the dominance of their competitor BT.

What's the big picture effect?

The deal would help both parties significantly in combining their financial strengths to invest and compete at a time when demand for 5G networks is increasing rapidly. The cost-saving benefits are also of important considerations for the firms as O2’s owner Telefonica has been in heavy debt.

As the deal is being structured as a joint venture rather than a typical merger, Telefonica will receive an equalisation payment of £2.5b from Liberty Global, reflecting the debt position Virgin is bringing into the new company. In exchange, O2 will enter into the deal on a debt-free basis, meaning Telefonica will retain O2’s debt liabilities. It is important for the lawyers in the legal due diligence process to ensure the new entity created under the deal will not be liable for past debts from O2’s side. Lawyers will also need to advise on the key contracts that will be transferred to the new joint venture company and make sure that no contractual breach will occur as a result of the deal.

At the moment, the merger is still subject to regulatory approval. The parties will need both the EU’s competition regulators and the UK’s Competition and Markets Authority (CMA) to give the nod. Analysts point out that the deal can benefit existing customers as it gives more access to the companies’ services and may enhance broadband speeds.

It is likely that the Virgin-O2 deal will be waved through by the CMA, given that the competition authority allowed a similar merger between BT and EE in 2016. It is also worth noting that under the pressure of the coronavirus crisis, the CMA has purportedly relaxed its strict assessing measures as it gave the greenlight to deals which were subject to greater scrutiny such as the £6bn Just merger. Moving forward, more consolidation deals like this are expected across different industries as firms try to cut costs to prepare for an anticipated major recession.

Report written by Long Dinh

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