Although raising the possibility of such a move nearly a year ago, Paolo Pescatore, TMT Analyst at PP Foresight, has nevertheless described the possible merger of Liberty Global’s UK multiplay operator Virgin Media with Telefónica’s O2 mobile telco in the UK as “a bolt out of the blue” and an intriguing move that is more likely to appease regulators than two mobile operators coming together.
“Let’s not forget the parents of both companies have been keen to offload these assets for a while,” he notes, suggesting there is more to this than simply convergence and competing with dominant telco BT and pay-TV market leader Sky.
Although recognising that the new entity will be far stronger, Pescatore is not sure it will be able to compete with BT and Sky, and points out that a few obstacles need to be overcome, such as the valuation of both companies and the existing MVNO agreements (Virgin Media with Vodafone, O2 with Sky).
“The major sticking point will be the valuation,” he says. “Virgin Media remains the crown jewels in Liberty Global’s portfolio, but also a problem child. Moves to divest other assets shows a desire to leave Europe by maximising the value of each asset, and proved to be a stumbling block in discussions with Vodafone.” According to Pescatore, as with O2, Telefónica needs cash to reduce its debt position.
“Neither company is immune to the driving need for a converged network and services,” he asserts. “This is the next battle ground in the UK. Virgin Media was one of the pioneers in this area, but has been let down without a mobile network, being late to market in 4G and running a struggling TV business, whereas O2 sole’s focus on mobile and championing consumers will run out of steam at some point,” he concludes.