The Recently Announced Merger between Telefonica’s O2 and Liberty Global’s Virgin Mobile Will Put Vodafone and Three UK on the Spot

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By Leo Gergs | 2Q 2020 | IN-5822

While talks around a potential merger have been in the news since the beginning of the month, it only took only until May 7, 2020 for Spanish-based network operator Telefonica and the multinational telecommunications company Liberty Global to announce the merger between their U.K. operations O2 and Virgin Mobile in a 50-50 joint venture. The move will see O2 being transferred into the joint venture on a debt-free basis, while Virgin Mobile will contribute a combined US$13.89 billion (GBP 11.3 billion). Subject to regulatory approval, the transaction will be completed during 2021.

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What's the News?

NEWS


While talks around a potential merger have been in the news since the beginning of the month, it only took only until May 7, 2020 for Spanish-based network operator Telefonica and the multinational telecommunications company Liberty Global to announce the merger between their U.K. operations O2 and Virgin Mobile in a 50-50 joint venture. The move will see O2 being transferred into the joint venture on a debt-free basis, while Virgin Mobile will contribute a combined US$13.89 billion (GBP 11.3 billion). Subject to regulatory approval, the transaction will be completed during 2021.

The decision to merge O2 and Virgin Mobile in the United Kingdom must be seen as direct consequence of both strategic and operational concerns from Liberty Group (as the owner of virgin mobile) as well as Telefonica (as the owner of O2). It is furthermore exacerbated by recent developments in response to the outbreak of the coronavirus disease (COVID-19).

What Is in This for Telefonica and Liberty Global?

IMPACT


For Telefonica, the merger provides security in terms of access to the British market in a post-Brexit scenario (irrespective of what potential agreements will look like). While current E.U. regulations guarantee the Spanish Communications Service Provider (CSP) access to the British market under exactly the same conditions as domestic network operators, the departure of the United Kingdom from the European Union (in January 2020) and the end of the transition period (in January 2021) will result in network operators from E.U.-member states losing this automatic privilege. By merging its operation with British network operator Virgin Mobile, O2 will continue to be considered a domestic network operator with guaranteed access to the U.K. market independent of any bilateral agreement between the United Kingdom and the European Union. In addition, Telefonica will gain access to virgin mobile’s national fiber-optic transport network, which is vital for commercial 5G rollout across the country. The importance of fiber-optic networks is exacerbated when considering the global response to the outbreak of COVID-19, since social distancing measures have resulted in a sharp increase of network traffic via fixed broadband and Fixed Wireless Access (FWA).

From a financial point of view, this provides Telefonica with a new opportunity to monetize its stake in O2 after previous efforts to sell O2 to CK Hutchison (owner of Three UK) were vetoed by the European Commission in 2015.

For Virgin Mobile, on the other hand, the merger gives access to O2’s existing mobile network assets: as the second largest mobile operator in the United Kingdom, O2’s nationwide subscriber base comprises 34 customers across 13 million households. Furthermore, O2’s comprehensive spectrum assets (on the 800 MHz, 900 MHz, 1.8 GHz, 2.1 GHz, 2.3 GHz, and 3.5 GHz bands) will be important enablers for further revenue generation. Particularly important in this context is O2’s possession of 40 MHz on the 3.5 GHz band, which is the prime band for commercial 5G rollout. While as of May 2020 Virgin Mobile itself does not hold any 5G spectrum assets in the United Kingdom (and can only offer 5G services through MVNO agreements), the merger will give Virgin Mobile direct access to the 3.5 GHz band.

From an operational point of view, it should be noted that throughout the last few years, Liberty Global, in a move to cut operational costs and increase short-term profitability, decided to close a number of retail stores. Utilizing Telefonica’s retail infrastructure would increase Virgin Mobile’s brand visibility on British High Streets.

What Does This Mean for the U.K. Telco Industry?

RECOMMENDATIONS


The announcement of the merger between Virgin Mobile and O2 will put additional pressure on the remaining CSPs on the British market to advance their own fiber deployment projects in order to maintain their position on the U.K. market. News of BT suspending dividends worth an estimated GBP 2.5 billion (the equivalent of US$ 3.08 billion) and using these funds to accelerate its Fiber-to-the-Premises (FTTP) deployment and 5G are only a first indication of what network operators need to be prepared to sacrifice in order to maintain their long-term position in the U.K. market.

Specifically, this leaves Three UK as the only U.K. network operator without any fixed-line base of its own. While Vodafone’s very limited fiber network resources stem from its Cable & Wireless acquisition (in 2012), it sources its consumer broadband products from BT Openreach or Cityfibre. Consequentially, its reliance on a third party for commercial broadband deployments is still relatively high.

These strategically motivated decisions around BT and the merger of O2 and Virgin Mobile underline that operators need to have a solid fiber strategy in place in order to secure their future stream, particularly in the context of 5G deployments picking up the pace in 2020.

 

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