As recently rumoured, and following confirmation that talks were taking place, Liberty Global and Telefónica are to merge their UK operations in a 50-50 joint venture that brings together Liberty’s multiplay operator Virgin Media and Telefónica’s O2, the country’s largest mobile platform.
The pair say the combination creates a stronger fixed and mobile competitor in the UK market, supporting the expansion of Virgin Media’s giga-ready network and O2’s 5G mobile deployment for the benefit of consumers, businesses and the public sector.
As a fully converged provider, the JV will provide more competition in the marketplace and choice for consumers. In addition, the JV will become a leading challenger in the B2B space as the combination will accelerate the adoption of converged fixed-mobile services to Virgin Media’s and O2’s existing business customers and offer new services using both companies’ digital skills, networks and product portfolios, such as cloud, big data, Internet of Things and cybersecurity services. This will ensure sustainable competition in the small, medium and large business segments across the UK, which will benefit the overall British economy, they say.
The joint venture is expected to deliver substantial synergies valued at £6.2 billion on a net present value basis after integration costs, and equivalent to cost, capex and revenue benefits of £540 million on an annual basis by the fifth full year post-closing.
The vast majority of the benefits relate to demonstrable cost and capex synergies, with an annual run-rate of approximately £430 million out of which approximately 80 per cent are expected to be achieved by the third full year after the closing. The key expected sources of cost and capex synergies include:
In addition, the JV is expected to realise significant growth through cross-selling opportunities and scale, resulting in revenue synergies with an estimated annual run-rate of approximately £110 million on an annual basis.
To achieve these synergies, the JV expects to incur approximately £700 million of integration costs, most of which should be incurred in the first four years after the closing.
They say it is an attractive valuation for both businesses, with O2 valued at £12.7 billion and Virgin Media valued at £18.7 billion, both on a total enterprise value basis. O2 to be transferred into the joint venture on a debt-free basis, while Virgin Media to be contributed with £11.3 billion of net debt and debt-like items.
Both parties expect to receive net cash proceeds at closing following a series of recapitalisations that will generate £5.7 billion in proceeds for Telefónica and £1.4 billion for Liberty Global (after an equalisation payment to Telefónica of £2.5 billon.
The transaction is expected to close around the middle of 2021 and is subject to regulatory approvals, consummation of the recapitalisations, and other customary closing conditions
Telefónica Chief Executive Officer, Jose Maria Alvarez-Pallete, said, “Combining O2’s number one mobile business with Virgin Media’s superfast broadband network and entertainment services will be a game-changer in the UK, at a time when demand for connectivity has never been greater or more critical. 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. This is a proud and exciting moment for our organisations, as we create a leading integrated communications provider in the UK.”
Mike Fries, Chief Executive Officer of Liberty Global, said, “We couldn’t be more excited about this combination. Virgin Media has redefined broadband and entertainment in the U.K. with lightning fast speeds and the most innovative video platform. And O2 is widely recognised as the most reliable and admired mobile operator in the UK, always putting the customer first. With Virgin Media and O2 together, the future of convergence is here today. We’ve seen the benefit of FMC first-hand in Belgium and the Netherlands. When the power of 5G meets 1 gig broadband, UK consumers and businesses will never look back. We’re committed to this market and are right behind the Government’s digital and connectivity goals.”
Executive leadership of the JV will be agreed prior to the closing. The board will consist of eight members, four from each of Liberty Global and Telefónica . Fries and Alvarez-Pallette will sit on the board. The post of Chairman will be held for alternating two-year periods by Liberty Global or Telefónica with Liberty Global holding the position first.
Each shareholder has the right to initiate an initial public offering of the JV after the third anniversary of the closing. The parties have agreed to restrictions on other transfers of interests of their shares in the JV until the fifth anniversary of closing. After the fifth anniversary, each shareholder will be able to initiate a sale of the entire JV to a third party, subject to a right of first offer in favour of the other shareholder.